Monday, August 29, 2011

Trying to generate income by selling puts in Corning and BAC

With cash paying near zero, and fixed income yields low and facing the risks of rising interest rates eventually, it is a challenging time to generate income from a portfolio.  (or is that fixed,  Dividend paying stocks are certainly one alternative to generating income.  However, along with this approach comes all the risks associated with equity investing.  A way to reduce the risk of holding equities while actually generating more income than can be received from dividends is to sell naked puts for stocks that seem to have hit some floor level.

CCI made two trades at the end of last week and documented the rational and benefits of this type of trade in this article at seeking  It describes how selling puts in Corning and Bank of America at strikes well below both their current price and their book value can yield 4-5% in 1-2 months.  These position also offer a significant buffer of safety if the stocks were to resume falling in price.

After making the trades last week, it took some time to write and publish the article.  Both stocks moved up aggressively over that period of time.  The good news: that puts these trades solidly in the money and already ripe for potential harvesting.  The bad news: CCI readers may no longer have the opportunity to take similar position unless their is a pull back in price or they are willing to accept substantially less reward (and risk).

I'll add these two trades to the downgrade portfolio thread because they were initiated somewhat in conjunction with the market levels after the S&P downgrade of the US.

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