The incredible return for selling JCP 5-strike naked puts at Amerirade out to Jan. 2015
I am talking about selling FIVE-strike naked puts at a time when the stock is at $18.73, the ten-year low is $13.55, the company has real estate just appraised as being worth $18 per share and noted investor Feorge Soros recently took a 9% position in the stock for $16 per share.
Cash margin requirements at TD Ameritrade (and ONLY at TD Ameritrade - at other brokerages they are much higher) are:
1) Ten times the selected strike price which in this case is $5. So the first margin requirement is $50 per contract. This low requirement will remain in force as long as the stock is 12.5% or more above the strike.
2) The asked price of the contract. With the contract currently quoted at 439 bid, $40 asked, this second requirement is $40.
So total cash margin requirements at Ameritrade are presently at $90 per contract.
Investors selling at the bid price of $39 will receive about $38 per contract after commissions. So if held the full 19.4 months to Jan. 2015 expiration and the stock remains above the margin-safe price of a mere $5.65 (it's $18.73 now), the investment will pay $38 for every $90 invested which is a nominal 42.2% for 19.4 months. How does THAT sound for such an ostensibly riskless situation?
Does this sound too good to be true? Well, the fact is that it IS true - but only for those authorized to sell NAKED puts at TD Ameritrade.