Comments on Dividend Growth Investor: PepsiCo (PEP): a consistent dividend aristocrat

You are selling the options, therefore you will GE...

2010-03-23T14:11:21.823-07:00

You are selling the options, therefore you will GET the 204 Dollar for the Options.

Anonymous, I said sell the option, not buy the o...

2010-03-23T13:57:06.981-07:00

Anonymous,

I said sell the option, not buy the option. Sell the option to receive the premium, so you get paid a significant return just for waiting for a better entry price. You can either look at it as income or as a reduction of the cost basis.

I only recommend it with stocks you are actually interested in owning for the long term, though, due to careful analysis of the fundamentals.

Matt I don't get why anyone would want to do t...

2010-03-23T07:55:01.232-07:00

Matt I don't get why anyone would want to do that, perhaps you can explain what I am missing?

If I bought 100 shares at $66.31 today my total cost would be $6,631.00

If I bought the option for $204 and then purchased 100 shares at $65, my total cost would be $6500 + $204 = $6704.00

So even though we paid less per share, we are paying more overall?

And if the price does not go down you just lose that option money right?

Hi there- good post. One thing to consider is th...

2010-03-22T16:46:49.903-07:00

Hi there- good post.

One thing to consider is that investors don't necessarily have to decide between buying now or waiting. A lot of long-term investors ignore the use of options, but long-term income investors can gain a lot by using them.

For example, right now, PEP is at $66.31/share. You can sell July 10th calls for $204 which obligates you to buy 100 shares at $65 if the stock price dips below $65 during the timeframe. This means that you get 204/6500 = over 3% of your investment back in premiums, and then you'll be obligated to buy at $65 if the buyer decides.

Or you can sell July 10th calls at a strike price of $62.50, but receive a premium of only $131 (2% of your investment).

The point is, if you want to own the stock but want it at a little lower price, you can sell an option to make income on your money and then either own the stock in the future at the price you wanted, or if the options expire, you can sell more options.