Cash secured puts

Yes, you did read that right. Whilst the straight dividend investors amongst you may well be eyeing up Lloyds Banking Group shares because of the forecast 5.9% dividend yield, yesterday, those in the know were selling cash secured puts on exactly the same shares and pocketing a premium that equated to a 29.4% annualised yield.

And yes, that did include the commissions.

How so?

Well, when I checked yesterday lunchtime, the shares were trading at 58p on the nose. That meant that you could sell an At The Money (ATM) August put contract with a 58p strike price.

Instead of pitching lower than the current price, an investor may decide they are happy to pick up the shares at their current price. And those ATM bad boys are full of lovely juicy premium. Just ripe for the picking by experienced stock option sellers.

In the case of Lloyds, it was quite possible to sell a 58p strike put — with 39 days to run — for £20.

Now that might not sound a great deal, but you are only committing to pay £580 for 1,000 Lloyds shares. So — depending on their account size — it’s quite possible an investor could have sold a bunch of Lloyds puts. So that’s a bunch of twenties, not just one. And remember, even with commissions, that trade equated to an annualised yield of almost 30%. Pretty sweet.

Okay, so what’s the risk?

If the price of Lloyds shares is above 58p in 39 days’ time, then the options will expire worthless and the seller’s obligation will be lifted. They can simply go again.

On the other hand, if Lloyds shares drop below 58p by the 16th August, the seller has an obligation to buy 1,000 of them for 58p each. That’s your risk.

But remember, you’ve already been paid 2p per share to offset against any drop in the share price. And of course, if you do end up buying them, you have that excellent 5.9% dividend yield to look forward to and the chance to sell ‘Sell High’ contracts to bring in even more income.

Learn more about my FIRE-Revolution income strategy, or better yet get in touch and we can have a chat.

Third Friday Ltd are not regulated by the Financial Conduct Authority and the FIRE Revolution training programme is purely educational in nature. Under no circumstances do we provide any financial trading or investment advice. Any examples used are for educational purposes only and should never be construed as advice. We accept no responsibility for any investment losses you may incur. Please consult a financial advisor or other qualified professional if you are in any doubt as to the suitability of the strategies we teach.