The Money Tree

Safely Generating Income in Retirement

Dividend Superstars – Potential New Trade – WAG

Posted by mounddweller on February 6, 2012

Fellow Traders,

Yesterday I set out to write a post on four possible trades from my dividend supertars list.  Unfortunately, I ran out of time and didn’t get anything posted.  So, this evening I’m taking a slightly different approach.  I’m going to attempt to finish a post on one of them.  If I get it finished then I’ll start another post with my next selection.

As you can see from the title my potential trade involves Walgreens (WAG).  This is a stock I’ve been following for a couple months now.  As a matter of fact I already have an open trade in WAG.  Specifically, I’m short 4 FEB $30 puts.

This new trade is a bit different than any others I have written about previously.  It is different in that in addition to doing a rather ordinary buy/write trade I am also going to buy a protective put.   A protective put allows me to buy insurance for a decline in the price of WAG.

Let’s look at the specifics of the trade I’d like to execute.

As I mentioned above this trade involves a buy/write.  Specifically, I would like to buy 400 shares of WAG at today’s closing price of $34.28 and at the same time sell to open (STO) 4 MAR $34 Calls at $1.17.  Then, I would like to buy to open (BTO) 4 MAR $31 puts at $0.21.

This trade has many possible outcomes, two of which I’ve included in my spreadsheet above.  First, if the calls are assigned at $34 at expiration on March 16 I will have earned $250.30 or 1.82% ROIC.  Second, if the calls expire OTM and worthless I will have earned $379.20 or 2.76% ROIC.  Both of these scenarios give me a return greater than my desired minimum of 12-15% per annum.

My net cost (or break-even point) in this trade is $33.35.  Having purchased the put at the $31 strike price means my theoretical maximum loss is $2.35/share or $940.  This equates to 6.85% of my invested capital.

My plan if WAG declines by March 16 would be to sell to close (STC) the puts prior to expiration and and use the proceeds to lower my cost basis.  Then, I would sell another round of covered calls.  The decision to purchase additional put protection would be dependent on how the overall market was acting.

If you would like more information about Walgreens, I have written about it before.  You can read it here: https://troysmoneytree.wordpress.com/2012/01/14/new-trade-wag/.

As I mentioned at the beginning of my post I have a few other trades I am considering.  These also involve executing buy/writes with a protective put.  Stocks I’m interested in are AVP, BBY, and CHRW.

Regards,

Troy

 

 

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3 Responses to “Dividend Superstars – Potential New Trade – WAG”

  1. Stephen Almond said

    Troy,

    Nice trade, although I’m showing different values for the two options (not $1.17 and $0.21, but $0.81 and $0.33).
    Did you consider a simple bullish put spread – sell the Mar 34 Put, buy the Mar 31 Put?

    Steve

    • mounddweller said

      Steve,

      Thanks for your comments. The prices I quoted were Monday closing price. No, I did not consider a bull put spread. The bulk of my trades are in my IRA where I am somewhat limited in what kinds of option trades I can execute.

      Regards,
      Troy

  2. Rescue Jim said

    I pulled the trigger on WAG as well although I went out to APR for the covered call. Details are in this post:
    http://rescuemyira.blogspot.com/2012/02/tongues-will-wag-new-position.html

    I really enjoy your posts!

    Rescue Jim

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