Adding to my CSCO exposure in the naked put-writing portfolio
Sold 20 CSCO Jan. 15 naked puts for $78 each when the stock was at $17.99 and near a 20-month low. Net proceeds after commissions. of $1,540.
Cash required to do the transaction was $4,580 and so if the stock closes above $15 in 45.4 weeks and no more margin is required, the return for the duration would be 33.6% which is 38.5% annualized.
For this portfolio to date, this is about as risky a play as I have made since more margin would be needed if the stock goes below $16.75 or so. It would take an additional $1,750 for this group of 20 contracts to give me margin protection down to $16.00 and if I did have to deposit the extra funds, the return on investment would be reduced to 24.4% for the 45.4-week duration or 27.9%.
I'd be pretty surprised to see the stock go below $16 but if it did, my move would be to roll the 15-strike naked puts expiring in Jan. 2012 out a year to the 12.50-strikes expiring in Jan. 2013. I should at least be able to do that rollout for free although I'd actually expect garnering a slight credit balance.
If done for free though and I took back the additional deposit, the return would be 33.6% for 97.4 weeks instead of for 45.4 weeks. However, that is STILL 17.9% annualized and I'd have margin protection all the way down to $14 on the stock.
If CSCO went below $14, I'd re-deposit the $1,750 which would give me margin protection to about $13.20 and still result in an annualized return of 12.9%.
The potential rewards here are just outstanding and yet it would take a LOT of downside before I'd actually have to accept a loss. The lowest that CSCO ever got at the bottom of the crash was $13.60.
03/10/2011 11:00:03 Sold 20 CSCO Jan 21 2012 15.0 Put @ 0.78 1,539.97
The techs have been very weak this quarter and the end of Q1 with the negative window-dressing can be pretty brutal for underperforming stocks.
However, I don't see much more downside risk for CSCO after the quarter ends and I should still end up quite well on my 15-strike naked puts out to January. The valuation even at $17 is getting to be pretty compelling.