A horrible company is providing the safest returns over 20% a year I have ever seen
Is there a more poorly-managed company out there than JCP? If not for options, I wouldn't touch this company as at best I see the stock just holding current levels; the upside is almost nil. But the fact is that with real estate valued at between $14 and $18 per share, it's almost impossible for this thing to really crash. And if the stock's downside isn't that much, selling very deep out-of-the-money naked puts currently provides the safest investment I've ever seen that will return well over 20% on your money.
At TD Ameritrade and ONLY that brokerage, NAKED put margin requirements are as follows:
1) Ten times the chosen strike price as long as the stock remains 12.5% above that strike.
2) The ask price per contract
Currently, JCP is at $18.01 with the ten-year low being $13.55. The very safe 10-strike naked puts at Ameritrade are quoted at $43 bid and $45 asked per contract. So cash margin requirements at Ameritirade are $100 to satisfy the ten times the strike price requirement and $45 as the asked price pf pme cpmtract/ So total cash requirements come to $145. What a seller of one contract would receive is the bid price of $45 less 80 cents in brokerage commissions or $44.20 net. So if the stock can just stay abofve #$%$ more than $10 which is $11.25, the return if held to expiration would be $44.20/$145 which is a nominal 29.0% for eight months which is an amazing 43.5% annualized. But investors will do even better than that annualized since the options will be able to be bought back for the exchange minimum of $1 around Halloween when the time remaining to expiration is only a few months.
For those wanting an even safer investment, the 8-strike naked puts for January are now trading for $22 bid, $23 asked. The margin-safe price is all the way down to $9 per share (12.5% above the $8 strike price). Cash margin requirements are $80 (ten times the $8 strike) plus the $23 asked per contract or $103 all told. Up-front proceeds are $21.20 ($22 asked less 80 cents in commissions). So if held the eight months to expiration, the nominal return would be 20.6% which is 30.9% annualized. And with an expected early-out, the annualized return would likely balloon to the mid-to-high 30's.
And those that are ultra, ultra, ultra safe and want to invest in the FIVE-strike naked puts for January (margin-safe price of just $5.65 with the stock now $18.01), the bid is $10 and the ask is $11. Cash margin requirements are therefore $50 (ten times the strike) plus $11 or $61. Sellers of these options would receive $9.20 net per contract after commissions. And that's still 15.1% for eight months or 22.6% annuali9zed. And with the virtually-certainearly-out, actual annualized returns will be mid-20's.
Can you imagine earning a TWENTY-FIVE percent annualized return for JCP merely holding $5.65 when the stock is at $18, the underlying real estate is worth $14 to $18 per share, the 10-year low is $13.55 and George Soros just ten days ago bought 9% of the company's stock at $16?
Much to the dismay of my detractors, I had my Eureka moment retgarding this kind of situation in Aug. 2011 and I've been doing nothing but coining money for myself and my group of investors ever since. Which do you suppose is the better investment if you are looking to earn 15% over the next eight months - just needing JCP to be $5.65 or more or say needing Pfizer to be a $33 stock at which point the PE would be FIFTEEN for a 4% to 5% earnings grower?
Four years ago at the bottom of the crash, very deep-out-of-the-money naked puts such as the 5's and 8's weren't even offered. A put is an insurance instrument to protect holders of the stock somewhat if the stock collapses but with JCP at $18, who realistically would want to buy protection against the stock falling below $5 or even $8 within the next eight months? Especially when the real estate can be sold for $14 to $18 a share.
The only reason why the options exchanges even started introducing such low-stgrike options was due to clamoring by put sellers who can only sell fully cash-covered puts and cannot sell naked puts. About 98% of put sellers do NOT have NAKED put authorization and if they want to sell puts at all, it has to be FULLY CASH COVERED.
In fully cash-covered put selling, there has to be enough cash to withstand the stock going all the way down to ZERO. So for JCP for example, if an investor wants to sell say a Jan. 15-strike put which is currently $168 per contract, he has to put up a whopping $1,500 per contract. It's a reasonable play to be sure - 15% for eight months if the stock remains above $15. But this kind of investor can do way better if at the same time he sells the 15-strikes, he BUYS something like the 8-strikes which are at $23 asked. Because by buying those 8-strikes, the margin requirements are vastly reduced. Now the risk isn't from $15 to zero but from $15 to $8 since ownership of the 8-strike puts protects against declines below that price. Not that it is needed mind you but the brokerages will only impose margin requirements of $700 per unit with ownership of the 8's whereas margin would be $1,500 per contract without such ownership. The cash-covered put seller is more than willing to give up $23 per unit of his $168 in profits if he could reduce margin requirements by more than half. So now the net take is only $145 per unit instead of $168 but margin requirements are only $700 per unit and that's over 20%.