Put Selling Opportunity: SCA

Svenska Cellulosa SCA is a Swedish company that is one of the worlds largest in personal care products (e.g. babies nappies), the third largest supplier of tissue (e.g. toilet and kitchen paper) and one of Europe's most profitable producers of forest products.

The current stock valuation is around P/E 17, EV/EBITDA 12 and it pays a 2.8% dividend which has been growing nicely since 2010. Below is a chart of the share price from the past year.

The stock reached a peak around 200 SEK back in Jan and has been steadily falling since then and is now close to its 52-week lows. If however, we go back 2 years we can see there was a big run up at the end of 2012 before consolidation around 160-165. 

This look an interesting area for selling puts in SCA. At this moment the October 165 put can be sold for around 2.15 SEK or the 160 put for 1.05 SEK. The choice depends on how happy the investor is happy in holding SCA stock if assigned (the latter of course being less likely).

If the stock falls to these strike prices then the puts could be bought back and then rolled out to the next month and down at the same time. For example this would mean buying back the Oct 160 put and selling the Nov 155 put. This then would put the strike price of the option below the consolidation zone mentioned before. If the stock price then stayed above 155, the put would expire worthless and the investor would keep all the premium. Further declines would require further rolling down of the puts and potentially other strategies to keep the trade profitable.

An alternative strategy would be to accept the shares and then immediately sell a covered call to bring in more income. For example if assigned shares at 165 SEK, 'at the money' calls with strike price 165 would be selling for around 2.75 SEK for a month out. Adding the premiums from the put and call would total 4.85 SEK giving a cost price for the shares of 155.15 SEK. The shares would then be called away if the price finished above 165 at the end for the month.