By Paul Price of Market Shadows

We closed-out our Cummins (CMI) January 2014 $110 put for $1.40 per share on September 19 when the shares were riding high. We booked a $960 gain in just over seven months.  The details of that Sold to Open/Bought to Close (STO/BTC) transaction are shown below.

This morning CMI shares are down more than 8% after a badly received quarterly report. We still like the stock. Accordingly we sold a new CMI January 2015, $110 strike price put contract for $1040.00 ($10.40 per share).

As long as we are short the put, we are committed to buy 100 CMI shares at a net cost of $110 (the strike price) minus $10.40 (the put premium) = $99.60 per share. Thus $99.60 is our break-even price. Cummins has not spent one day in 2013 below our break-even price on this trade. Cummins traded as high as $139.17 just days ago.

The great put price comes from the combination of today’s big drop and the increased implied volatility--factors which contribute to great timing for put sales.

The new trade will be recorded in our Virtual Put Writing Portfolio.

Maximum profit would be keeping the $1,040 we received upon sale of the put without ever having to buy the stock. We'll achieve that result if CMI remains above $110 on the Jan. 17, 2015 expiration date.  Our maximum risk is to be forced to buy 100 shares of CMI at less than $100 (net). Since I think CMI is at a good price below $100, I don't mind committing to buying it cheaper (at our break-even price of $99.60).

Full details of all closed-out and open put positions: Virtual Put Writing Portfolio.

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