A potential WHEEL trade in $PEP

Updated

was trading around 120 in January 2018. It is currently trading around 99 and has a dividend yield around 3.75%
We're going to look for a strategy that can boost potential yield without taking on alot of risk. is going to trade ex-dividend on 5/31. We are going to look to sell a put that obligates the seller of this put to take ownership of the underlying stock if it closes below the strike price at expiration. We're going to select an expiration cycle that has 18 days to go, 25MAY. We're going to look to sell a put that is 1 point out of the money, 98. We're looking to collect around $110 for selling this put option. Our margin or risk in this trade is $9800, which means that if is below 98 at expiration (May 25th) we are going to take ownership of the stock at 98 per share, regardless where it is actually trading. As long as the price is below 98, we are obligated to take the stock. Here are the potential outcomes of this trade:

Stock trades and expires above 98. We get to keep $110 premium from the sale of 98 strike put. This represents about 1.12% return on risk or about 21.5% annualized.
Stock trades below 9 at expiration. We are long 100 shares of PEP at 98. Since we collect $110 by selling this option, this premium will go towards reducing cost by $1.10
Our new cost basis is actually 96.90
We are going to look to sell a call against the long 100 share position with a strike price above our cost.
When PEP pays a $0.9275 dividend, this will also go towards reducing cost basis further. After we receive the payment our new cost basis should be around $95.97

Our plan would be to continue to collect dividends and sell OTM calls against the long stock position to continue to work our cost basis lower.

Note

JUN 97.5 Put is going to expire worthless. I am looking to sell JUL expiration, ATM put to bring in additional credit.

MrTopTick

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