I’ve been eyeing Aflac (AFL) for weeks, but couldn’t bring myself to jump in without a pull back during this recent run up. I entered the order a few days ago based on the chart that looked like it had some more room to drop towards $50, but with the belief that $51.00 might be the first area of support followed by around $49.50 and then $48.00. Those lines and the 2.3% dividend yield made the $50 strike the best move I thought. While AFL was trading at $52.10 this morning I sold one AFL January 50 naked put at $1.65 and received $162.99 after commissions.
I figured if I waited for AFL to fall and find support I would miss my opportunity on a quick recovery, so I left the limit order in place for longer than I do sometimes. With the steep decline in financials recently it didn’t take too long for my order to hit anyway with AFL down over 4.5% today alone. With such a big fall today it’s getting close to my first area of support and could get a dead cat bounce on Monday at best. Based on its previous falls it doesn’t stay down long. Once the fall is over it’s a rocket ship ride back to new highs.
For AFL to fall to a loss for me it would have to drop 17% from its intraday high it hit on November 5th. Even if it drops below that, it’s hard to imagine that it’ll fall more than 20%, below $46.65 and stay down too long there. AFL has fallen more than that in the past (even this year), but didn’t take very long to reach new 52 week highs after that. So as a potential longer term hold I don’t think I’m taking a big risk. If I am assigned the shares from this naked put I’ll take ownership of the shares before AFL’s next ex-dividend which I’ll be able to take while I sell a covered call and maybe a new naked put at a lower strike too. This is a pick I expect to stay patient with. We’ll see if I can actually do that.
Even with this trade I still have more than a $20,000 cushion before I go on margin if every naked put was assigned and no covered calls were. I need to add some more to my account now that we’ve had a little drop overall.