GIS – PUT Option

MBT BannerGeneral Mills is a blue chip dividend champion that we enjoy having as a part of our portfolio.  Here is a look to see if there is an opportunity to employ a short PUT option to increase cash flow.  Plus, selling a PUT could lead to a position if the stock where to drop.  For a fledgling account this could be quite a large position (100 shares per contract x ~$56 per share).  GIS does not have weekly contracts.  Therefore, we’ll look to the closest monthly expiration of JUN 15.

First, a look at the standard deviation

  • Time frame:  JUN 15 expiration (June 19th) – 29 days
  • IV:  16.97%
  • Price:  ~56.77

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Therefore, 1 sigma* (68 %) strike = 54

*Note, we have found that with short durations (1 month or less) on large cap stocks there is little to no premium on strikes below one sigma.

Second, what does the OI show us?

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One could argue that there is bias to the upside with the much larger number of CALLs.  The highest number of PUTs is around the 55 strike which would be ~1.77 points from GIS’s current price.  The next available strike is the 52.5 which provides negligible premium and will be ignored.

Third, what’s the payoff?

Just from a quick look at statistical analysis and open interest we can say with some assurance (70% or greater) that GIS may  be above a strike of 55 by expiration.  By selling one PUT we are positioned to take on the stock at $55/share (+ commissions and fees) as a worst case scenario.  What is the premium?  What is the profit?

At a strike of 55 the current premium for shorting a PUT is ~0.25.  So, 0.25 x 100 would yield $25 dollars.  Our risk is margin – premium, $4775.

Conclusion

So, we are tying up $4775 dollars (not including commissions) to earn $25 dollars over  a  29 day period between today and expiration.  Hmmm…..  That’s an APY of just over 5.1% APY.  Well, that’s nothing to write home about.  We took a pass on this one!


Disclaimer: The information presented does not consider your personal investment objectives and should not be taken as a recommendation. Further, it shall not be construed as an offer to sell or a solicitation to buy any security mentioned. The risk of loss in any stock, option, or futures trade can be substantial. Consider all relevant risk factors before trading.

 

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