Get Into Google At $502 Or Earn An Extra 8.72% In 7 Months

Selling puts is a great way to purchase shares in companies you like at a predetermined price. In essence, you are getting paid to put in a "limit order."

An investor usually sells a put option if his/her outlook on the underlying security is bullish. The buyer of the put option pays the seller a premium for the right to sell the shares at an agreed-upon price. If the stock does not trade at or below the agreed-upon price (strike price), the seller gets to keep the premium.

Benefits associated with selling puts

In essence, you get paid for entering a "limit order" for a stock or stocks you would not mind owning.

It allows one to generate income in a neutral or rising market.

When you sell a put you are in a way acting like an insurance agent. The Seller of the option agrees to buy the stock in the future if it drops to a certain level before the option expires. For this, you (the seller) are paid a premium upfront. If this strategy is repeated over and over again these premiums can really help boost you returns over time.

Acquiring stocks via short puts is a widely used strategy by many retail traders and is considered to be one of the most conservative option strategies. This strategy is very similar to the covered call strategy.

The safest option is to make sure the put is "cash secured." This simply means that you have enough cash in the account to purchase that specific stock if it trades below the strike price. Your final price would be a tad bit lower when you add the premium you were paid up front into the equation. For example, if you sold a put at a strike of 20 with two months of time left on it for $2.50; $250 per contract would be deposited in your account.

Every day you profit via time decay as long as the stock price does not drop significantly. In the event it does drop below the strike you sold the put at; you get to buy a stock you like at the price you wanted. Time decay is the greatest in the front month.

Google is still in a corrective phase and there is a decent chance it could test the 545-550 ranges before bottoming out. As indicated by the chart above the stock has pretty good support in this zone.

The Jan 2013 550 puts are trading in the 38.80-39.60 ranges. If the stock trades in the above stated ranges these puts should rise in value by another 7.00-11.00. We will take the midpoint and assume that these puts can be sold for $48.00 when the stock trades down to the stated ranges. For each contract sold, $480 will be deposited into your account.

Benefit

If the stock trades below the strike price, the shares could be assigned to your account. Your final price in this case would be $502.00. If the stock does not trade below the strike price, you get to keep the premium for a gain of roughly 8.72% in seven months.

Risks

The only risk is that the shares could be assigned to your account, but since you were bullish from the onset, this should not be an issue. You actually have the chance to get in at significantly lower price. If you have a change of heart because the stock is trending lower and the put is rising in value, then you can always roll the put. For example, if the stock is trading at 545, (the put is now $5 in the money), all you have to do is purchase this put back and sell the Jan 2013 540 put. The net result is that you will still walk away with a credit.

Company: Google Inc (GOOG)

Brief Overview

Levered free cash flow = $8.36 billion

Profit Margin = 27%

Operating Margin = 32%

Quarterly Revenue Growth = 24%

Quarterly Earnings Growth = 60%

Operating Cash Flow = $15.09Billion

Beta = 1.15

Percentage Held by Institutions = 83%

Short Percentage of Float = 1.7%

5 year sales growth rate = 22%

EPS 5 year growth rate= 21.8%

5 year capital spending growth rate = 11%

Long term debt to equity = 0.05

Growth

Net Income ($mil) 12/2011 = 9737

Net Income ($mil) 12/2010 = 8505

Net Income ($mil) 12/2009 = 6520

EBITDA ($mil) 12/2011 = 14177

EBITDA ($mil) 12/2010 = 12192

EBITDA ($mil) 12/2009 = 9905

Cash Flow ($/share) 12/2011 = 35.78

Cash Flow ($/share) 12/2010 = 30.96

Cash Flow ($/share) 12/2009 = 26.04

Sales ($mil) 12/2011 = 37905

Sales ($mil) 12/2010 = 29321

Sales ($mil) 12/2009 = 23651

Annual EPS before NRI 12/2007 = 13.29

Annual EPS before NRI 12/2008 = 16.5

Annual EPS before NRI 12/2009 = 21.08

Annual EPS before NRI 12/2010 = 26.31

Annual EPS before NRI 12/2011 = 29.76

Performance

Next 3-5 Year Estimate EPS Growth rate = 18.48

5 Year History EPS Growth = 24.41

ROE 5 Year Average = 20.16

Return on Investment = 18.15

Current Ratio 09/2011 = 5.80

Current Ratio 5 Year Average = 7.81

Quick Ratio = 5.60

Cash Ratio = 5.23

Interest Coverage = 222

Conclusion

Only put this strategy to use if you are bullish on the stock as there is a chance that the shares could be assigned to your account. In the event, the shares are not assigned to your account you have the potential to earn an extra 8.7%. If you are bullish on the stock at the current price, you could implement the strategy right way. The premium you receive will, however, be slightly lower.

Sources: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Options tables sourced from money.msn.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.