Lorillard Inc. (LO), The Clorox Co (CLX), Exxon Mobil Corporation (XOM): Be a Seller of Volatility

If you told me that I could buy The Clorox Co (NYSE:CLX) with a dividend yield of 3.6% I’d jump at that opportunity in an instant. Selling Clorox puts can make this happen.

Big oil, big premiums

Exxon Mobil Corporation (NYSE:XOM) is one of the largest oil companies in the world, with nearly $500 billion in annual sales. Exxon Mobil Corporation (NYSE:XOM) isn’t my favorite big oil company, partially because it’s so big that future growth will be difficult, but it’s a consistent dividend paying stock nonetheless. The dividend yield is low compared to its peers at just 2.79%, and dividend growth has been too slow to justify buying Exxon Mobil Corporation (NYSE:XOM) at the current price. However, selling a put let’s you pick your own price, so we can simply choose a strike price which would give us an adequate dividend yield.

One option is the September $85 contract. This comes with a $136 premium and a buffer of 6%. If the option expires worthless the annualized return of this option is about 7.1%. If the price does fall below the strike price then you’d be obligated to buy the stock at $85 per share, with a cost basis of $83.64 per share factoring in the premium. The dividend yield at that price would be a far better 3.01%.

I’d want at least a 3% yield to consider Exxon Mobil Corporation (NYSE:XOM), and higher would be better. The $80 strike price, while lowering the annualized return to 3.5%, would allow you to buy Exxon Mobil Corporation (NYSE:XOM) with a dividend yield of 3.18% if the option were exercised. There’s a trade-off here between the premium and the dividend yield, with a higher possible yield leading to a lower premium.

The bottom line

With volatility high put premiums for certain stocks are lucrative. If you’re looking to buy a stock at a lower price than it trades for today consider selling a put option. You either collect a hefty premium or you get to buy the stock at your desired price. It’s a win-win.

The article Be a Seller of Volatility originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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