Options aside (that's way outside of my bailiwick at the moment from a knowledge of how it works, etc), my understanding is that there are quite a few individual lawsuits regarding the earplugs across the US, so this has the potential to drag on for quite a while (which could be a good thing, in terms of payouts over time instead of one big hit). I'm leaning on holding long and keeping the dividends coming, but I've been reading some more negative outlooks that raised the question in my mind. Thanks, and one day I'll get this whole puts thing down, haha.
Options are intimidating, but the basics aren’t really that complicated once you get comfortable with them. They are contracts for 100 shares each but are priced for a single share. It’s weird, but you just multiply the option price by 100.
When you buy stocks, it’s not a bad idea to place a limit order (instead of a market order) to only execute the trade once the share price comes down to what you want to buy it at. The same thing can be accomplished (if round lots of 100, 200, 300, 400, etc shares are being purchased) by selling one put for every 100 shares. The put option is priced for one share and needs to be multiplied by 100x for the cost of the put contract. Simply sell the put with a strike lower than the current price of the shares. The further out the expiration date, the more money you get for selling the put. The biggest caveat is that there needs to be cash in the account to cover the purchase price of the shares. Another issue is that if the price of the stock goes up then the share purchase will not happen. But that is also the case if entering a limit order to buy the shares at a lower price.
I am actually considering doing the following. I will see how the markets open tomorrow morning.
Instead of buying 100 shares of MMM for $129.10 - I might sell the 9/2/22 125 put option (last trade was for $2.60 (times 100 so I’d receive $260). Then if MMM stock falls below $125 I will be purchasing the 100 MMM shares for $125/share. If MMM stock stays above $125 all week I won’t be assigned MMM shares BUT I will pocket the $260 as the put option will expire worthless (I sold the option - worthless is good).
The MMM 9/9/22 125 put is (was at the Friday close) $2.90. $2.68-$3.90 (bid/ask). $2.90 was the LAST trade.
The MMM 9/16/22 125 put is $3.50-$3.75.
The MMM 9/23/22 125 put is $3.50-$5.15.
As far as the dividend, they pay $5.96/year. The earnings per share was $7.16. So as long as their earnings don’t have a sustained drop they are earning enough profit to cover and preserve the 4.62% dividend.
Who knows what happens with the litigation? Unless MMM was extremely negligent I wouldn’t think the earplugs suit will destroy the company. They would have been required to already have a reserve for any probable losses (unless the litigation has just occurred). The likely outcome should already be reflected on their financial statements. That’s what the outside CPAs that they hire to audit their books would require - otherwise the CPA firm could face litigation.
MMM does carry a fair amount of debt. Almost $17 billion. The market cap for the company is $73.5 billion. The Trefis estimated valuation for MMM is $85 billion. P/E ratio is 18x.
