Sold Eli Lilly & Co (LLY) Naked Puts

My allocation towards healthcare stocks has been hurting lately and I haven’t been able to decide in which direction I wanted to go.  That changed after I read an article in Barron’s yesterday that listed a handful of dividend paying stocks that have yields greater than their five year debt.  Eli Lilly & Co. (LLY) caught my eye since I’ve been searching for the right healthcare stock and also for more dividend paying stocks at a value.  LLY has a dividend yield of 5.5% and a P/E ratio of only 9.4% which is low for the industry (13.98).  The current P/E ratio puts it near the low end of its historic range.  The question is if LLY can maintain earnings close to its current levels in the future or am I walking into a trap.

Once I felt somewhat comfortable with the fundamentals I moved on to the chart.  LLY’s chart didn’t jump out to me with a powerful story right away so I tried various timeframes to see if I could find anything to give me a hint on where it might be headed in the shorter term.  I was already convinced that longer term it’ll move higher which only left the question of whether or not today was the best time for my entry or could it get cheaper soon.  Again, that’s a tough call with LLY almost right on the half way mark between its December highs and February lows. 

After a little debate I decided the downside risk was limited and expect to find technical support not far below $34.00 if even that far south.  The dividend yield should give it an extra safety net as Andrew Bary writes in the Barron’s article.  With that in mind I decided I should stop waiting and make a trade.  While LLY was trading at $35.56 I sold three LLY May 35 naked puts for $0.96 each and received $286.61 after commissions.  I considered aiming higher for the strike, but opted for the lower risk trade since I didn’t get a clear read on the chart.  With such a high yield for the stock I wouldn’t mind owning it and selling covered calls, but I’m not so bullish yet to sell in the money naked puts.  That might change over the months as I keep re-writing options on this one as a potential frequent part of my portfolio.

On another note, I might not do much more trading this week.  On Friday I’m having another surgery on my neck to remove three more discs and fuse the four vertebrae that go with them.  It’s pure luck that I timed it for a day the markets will be closed, but I was actually pretty happy to hear that, especially since it is the day new jobs data is released.  I still plan to get an end of the month summary posted in a couple of days and also a quarterly update for the stock picking contest I’m a part of with some other financial bloggers.  I’m not sure how much I’ll trade next week either since I’ll be fairly dopey (even dopier than usual).  Excuse me in advance for some odd posts if I do get to the keyboard.