The best time to sell a put on a stock is right after it takes a big drop and starts to level off. That’s because most investors tend to extrapolate a recent trend indefinitely into the future, even though that rarely happens. What does occur more often than not is “reversion to the mean”, which results in the share price gradually moving back towards the direction from which it came.

I believe that’s what is going to happen with media analytics company Nielsen Holdings (NYSE: NLSN), which lost nearly a quarter of its value over the past week after releasing disappointing Q2 results. I won’t try to put lipstick on this pig; it was an ugly quarter and the stock deserved to get hammered. The company also announced the retirement of its CEO at the end of this year, which means major changes should soon be on the way.

I don’t expect miracles, but at this point the news is about as bad as it can get so a little reversion to the mean, even if it is only a “dead cat bounce”, is almost inevitable. In fact, we only need the stock to not fall any further by expiration date for this put option to expire out-of-the-money. In the meantime, we can collect what works out to a 3% option premium for only a six-week holding period.

An added bonus: If you are put the stock prior to expiration you will also collect the next dividend payment of 35 cents per share payable to stockholders of record on August 22. Combined with our 65 cents (or more) of option premium, the total cash flow from this trade works out to 40% on an annualized basis!

Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.

How to Make the Trade:

• Trade: Sell to open the September 21, 2018, $22 put option on Nielsen Holdings (NYSE: NLSN).
• Symbol: NLSN180921P00022000

Allocation: Sell one put for every 100 shares of Nielsen Holdings you would be pleased to buy at $22 per share. Investors should set aside $2,200 per contract sold to buy the stock in case the option expires in the money.

• Prices:
  • Current Stock Price: $22.55
  • Limit Order Price: a credit of $0.65 or more.
  • Tell your broker: “I want to sell a put on Nielsen Holdings stock. Specifically, I want to ‘sell to open’ one September $22 Put for a credit of $0.65 per share or more.”

• Further Instructions Regarding the Trade:
  • If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least equal to the Limit Order Price specified above.
  • Place your limit order on a “good ’til canceled” (GTC) basis and be patient.