By Robert Hauver
With the New Year looming, 2010 market forecasts are becoming more focused. There appears to be an early consensus that 2010 will begin well, and taper off in the second half, due to less Fed support, and many other factors.
But maybe you don’t want to wait for a possible market downturn to “buy on the cheap”, but would rather get paid sooner than later? Income investors looking to lock in some income in 2010 should consider selling puts on dividend paying stocks that they want to own at a cheaper level than today’s prices. Here are some points to consider:
1. What dividend yield % do you want from a given stock? If the current yield is too low, determine what price you’d have to pay to reach your goal. Is there a put strike price with a breakeven point that will bring you close to your target buying price and dividend yield?
2. Compare the dividend yield to the put option yield. Is it worth it to sell put options, or would you be better off buying now or waiting for a downturn? Put option premiums often outstrip dividend payments, but there are tax considerations also.
3. Taxes – If you sell a January 2011 put option, you’ll be taxed as a short term gain at your personal tax rate, BUT, not until the 2011 tax year, if you hold the option until expiration. Depending upon your tax rate, this could be a pretty good deal – you collect now, but you don’t have to pay taxes on this money until April 15, 2012.
If you close out, (buy to close), the sold put option, this trade is taxed during the year in which it was closed out.
Interestingly enough, the IRS site states that if the underlying stock is assigned to you, instead of reporting a gain on the put sale, you simply reduce your cost basis in the assigned shares by the amount of put premium you received. This means that you won’t pay any tax on this trade until you sell the assigned shares, which would further defer your tax bite.
In our previous articles about Selling Puts vs. Dividends, we listed some specific put selling trades for well-known Dow stocks, that further illustrate this concept.
Nobody can foretell the future, but selling put options is at least one conservative, cash-generating strategy worth considering when looking toward the New Year.