I hate to miss out on selling volatility on days like today that have good spikes in fear so I went shopping this morning for some new positions. I entered limit orders for new naked puts on UCO, DVY, EEM and ITRI in case we get another leg lower in the next week or so. I have alerts set up on a number of other stocks to remind me to check them out if they hit key levels too. When I saw CSX down more than 2.5% on the day I checked the chart and the options and saw what I think is a good opportunity.
While CSX was trading at $60.17 I sold one CSX January $57.50 naked put for $1.70 and received $169.31 after commissions. That gives me a 7.25% cushion before this turns into a losing trade. CSX has a forward dividend yield of 1.7% which isn’t massive, but helps offer some support in the event of a deeper fall. Its forward P/E ratio is only 12.80 which is in the lower half of its historical range and in line or cheaper than its major competitors.
Even though I’m bullish on CSX for the longer term I won’t be surprised if it dips a little deeper before turning around. That’s why I only sold one call to start with today. I didn’t want to miss out if the markets decided to do an about face and move higher before the close and also didn’t want to overextend myself if it follows the path its chart says is possible. First of all, CSX is still holding support from its intraday low last week. I have no reason to say that support is going to break, but if it does, CSX could head back down to $59.00 where it gapped up to on October 11th and then used that range as support two days later. That’s also close to the 50 day moving average. Based on that logic I could’ve gone with the $60 strike, but I saw the Fibonacci 61.8% retracement level at $57.59 and the 50% level at $55.47 and thought more downside was possible to reach these marks. I had already pegged the $56.00 range as likely strong support and with a possible 17%+ annualized gain from this strike I didn’t feel I needed to risk any higher dollar assignments. That’d just be greedy.
If CSX drops another couple of dollars and I see it starting to find its footing I plan to sell another naked put. If I change my mind and take an assignment on just 100 shares I’ll be set up to write an options strangle on CSX with a new naked put at a lower strike and a covered call at a higher strike. If CSX reverses and heads higher soon I might close this put and roll it higher, add another put at a higher strike in addition to this one or just leave it alone and move more of my account onto potential margin by doubling up elsewhere.
You should have a look at ABT. It looks a good value play at these levels. The January 46 Puts are selling at $1.15 which would give you a basis of $44.85. Even if ABT continues to drop and you’re assigned, you should have no problem reducing that further to $44 giving you a 4% dividend yield on your basis.
I like the idea of having this stock as a long term holding and selling Call Options 3-months out for 1% of the share value. This would give you a 8% (4% dividend, 4% premiums) annual return with the possibility of further upside in the shares themselves.
I’ll start watching ABT Ronan. I’d like to see its slide stop before getting in, but I think you’re right about these levels being a possible fair value. $46 has played a good role as support in the past.