Options Trade – Merck & Co. (MRK)

On Friday, I sold 10 Put contracts on an old favorite – MRK (50 strike – expire on 10/17/2015).  Received $750.00 premium.  The last time I did this trade, I only received $650.00 premium and the strike price was 55 – thanks to a little volatility, I am getting a better deal this time.

I am not fooling myself, there is a lot of negative short term news about Merck, so it will probably fall more – but I really would not mind getting the shares at that $50.00 per share price.  Merck’s fair value – according to Morningstar is $65.00 (lowered from $67.00 on Thursday 9/17/2015) – so I am getting a comfortable Margin of Safety.

To review the trade, MRK is currently selling at $52.13 per share – so, in the next 26 days – here is what could happen:

• Stock goes up, option expires – I keep the $750.00.
• Stock stays flat, option expires – I keep the $750.00.
• Stock goes down, but remains > or = to the $50.00 strike – option expires, I keep the $750.00.
• Stock goes down below $50.00 per share (and stays there), the options are exercised – and I am forced to buy 1000 shares of MRK at $50.00 a share.  Note: I still keep the $750.00, so my basis would be $49.25 per share.  I am excluding transaction costs to keep the math simple.
• If I get the 1000 shares – I will start receiving a 3.5% dividend every 3 Months ($450.00), and I can sell covered calls for income, or to unload the shares.

Given these scenarios – I really like this trade.  The only wild card is September and October are really bad Months for the market – so this could be an exciting ride.