Selling A New Put On Cummins
By Paul Price of Market Shadows
We closed-out our Cummins (CMI) January 2014 $110 put for $1.40 per share on September 19 when the shares were riding high. We booked a $960 gain in just over seven months. The details of that Sold to Open/Bought to Close (STO/BTC) transaction are shown below.
This morning CMI shares are down more than 8% after a badly received quarterly report. We still like the stock. Accordingly we sold a new CMI January 2015, $110 strike price put contract for $1040.00 ($10.40 per share).
As long as we are short the put, we are committed to buy 100 CMI shares at a net cost of $110 (the strike price) minus $10.40 (the put premium) = $99.60 per share. Thus $99.60 is our break-even price. Cummins has not spent one day in 2013 below our break-even price on this trade. Cummins traded as high as $139.17 just days ago.
The great put price comes from the combination of today’s big drop and the increased implied volatility--factors which contribute to great timing for put sales.
The new trade will be recorded in our Virtual Put Writing Portfolio.
Maximum profit would be keeping the $1,040 we received upon sale of the put without ever having to buy the stock. We'll achieve that result if CMI remains above $110 on the Jan. 17, 2015 expiration date. Our maximum risk is to be forced to buy 100 shares of CMI at less than $100 (net). Since I think CMI is at a good price below $100, I don't mind committing to buying it cheaper (at our break-even price of $99.60).
Full details of all closed-out and open put positions: Virtual Put Writing Portfolio.
****
P.S. Don’t Miss Actionable Alerts / Newly Published Articles
If you haven’t already done so, please provide your e-mail in the subscription bar indicated by the Red Arrow at Market Shadows. An active version of this screenshot appears near the top of each MarketShadows page.
You’ll receive real-time alerts when we make changes to the Virtual Value Portfolio (equities) and the Virtual Put Writing Portfolios. Nothing is required other than a valid e-mail address. Please confirm your subscription once it is activated (check email).
None