Recently, I decided to place another limit order with a premium of $0.68 for a put option on Roger's Communications. This was a 2nd "sell to open" put option, which means if the order goes through I am paid a premium. Since 1 contract represents 100 shares, I was paid $57.05 after commissions. I am paid a premium as I make a "promise" that I will buy 100 shares of RCI.B at the strike price of $42.00 if the stock price falls below $42.00 and it is assigned.
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3 possible outcomes :
(1) If the stock goes up, I made $57.05 without putting up any money.
(2) If the stock goes sideways and the stock doesn't fall far enough, I made $57.05.
(3) If the stock goes down below the strike price of $42.00 and his assigned, then my cost basis is lowered.
What is my adjusted cost base if put is assigned?
ACB= # of contracts*100 shares*strike price - [option premium - option premium commission] +commission for option being assigned.
= 1*100*$42.00 -[$68.00 -$10.95]+$24.95
=$4167.90
RCI.B currently pays an annual dividend of $1.83/share. YoC=1.83/41.6790=4.391%
How is this different if I bought the shares outright without an option?
Cost of 100 shares =$4200
Commission = $4.95
ACB/share = $42.05
YoC= 1.83/42.05 = 4.352%
The yield on cost is greater where a put was sold and assigned over just buying the stock outright. This means my money is now working harder for me. Selling a put option allows me to get paid while I am waiting for the price of a stock to go down to a point that I am comfortable buying it. The other option is to put in a limit order to buy the stock at $42.00 and wait.
NOTE: Selling puts is deemed to be risky, as the stock can go to zero or decrease in value really quick.
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