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Pfizer Inc. Message Board

  • eureka201112 eureka201112 Feb 5, 2012 3:11 AM Flag

    Some clear thinking for hotpanera2 regarding stand-alone returns on invested capital

     

    I'll compare two different investors; each of whom put up 25K in cash to sell BAC 3-strike naked puts which results in a 5K profit at maturity a year later.

    Investor A opens up a new account at my place and this is the only investment in the account. No added margin is ever needed beyond the 25K initially put up. Clearly for this investor, the return on both the stand-alone BAC naked put investment as well as the portfolio return is 20% for the year.

    Investor B is a wealthy old man living alone with few friends and estranged from his family. He opens up a new account at my place for a million dollars. He starts off by investing 25K grand selling the BAC 3-strike naked puts and a year later he has earned 5K on it.

    However, before he could get around to investing the rest of the funds, his incipient Alzheimers starts getting the best of him and he is placed in a nursing home. He is totally out of it and forgets that he opened up that new account. He's wealthy enough that he wouldn't even care.

    At any rate, the surplus 975K just sits in the new account for a year. So what is the return on the stand-alone BAC naked put investment at my brokerage and what is the portfolio return?

    Just plain common sense tells you that the stand-alone return on the BAC naked puts is exactly the same as Investor A - 20% for the year. His entire portfolio though has only earned 0.5% for the year. That return consists of 20% garnered on the 25K BAC investment and zero percent on the 975K excess cash that he intended to invest but never got around to doing so. In plain English, the stand-alone return on the BAC naked put-writing component has absolutely NOTHING to do with the amount of excess cash in the account.

    In order to have any kind of rational discussion with you regarding investment returns, you simply MUST be able to grasp what I just said.

    This topic is deleted.
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