This means you would get $92 for each option you write, because each option represents 100 shares. If the stock isn’t below $15 on Feb. 19, the option is worthless at expiration and you get to keep all of the $92.
If the stock is below $15, the shares could be put to you, meaning that you will now have to purchase 100 shares of Bank of America stock for each put contract that you wrote. Your purchase price will be $15 – as dictated by the strike price of the option you wrote – but you also have the $92 that you collected from writing the put. This means that your cost basis is $14.08 rather than $15 if the stock is put to you.
With the range that Bank of America has been in, do you really mind owning the stock at a cost basis of $14.08? The stock hasn’t been under $14 since November 2013 and it pays a 1.3% dividend.
While writing puts might not be an exciting strategy, it can be a source of income for your portfolio. It can also be a way for you to set a specific price where you want to own a given stock.
The range Bank of America has been in makes for a perfect put-writing strategy.
This article is brought to you courtesy of Rick Pendergraft from Wyatt Research.