If done at my brokerage using cash as collateral, the annualized return for selling the INTC 10-strike naked puts out 19 months to Jan. 2013 is 22.4% for the duration or 14.0% annualized. That's as good a return as I have ever seen for any investment with this much safety. After all, INTC is more than DOUBLE that price and never wnet below $12 during the crash when there was less earnings.
The math goes like this: With a quote of $31 bid, $34 asked, margin maintenance is $134 per contract at Ameritrade. After commissions, up-front premiums are $30 per contract. That's 22.4% for 19 months which is 1.18% per month or 14.0% per year.
The stock could literally get cut in half and a naked put investor would STILL walk away with this return.
This kind of return and higher for a select number of relatively low-priced stalwarts are available due to naked put premiums being the highest seen since the March 2009 bottom of the crash and to the 6/23/10 decision of this brokerage to lower margin requirements to the lowest mandated by the options exchanges. As far as I know, they are the only house in the country to have done this.
Who knows. But for those wanting an outstanding return in the teens no matter what, this play simply can't be beat. If for whatever reason INTC is $15 in 19 months, those owning the stock now will have losses of over 30% from here. While the naked put investor would have GAINS of 22.4%.
What a difference - a 22% gain versus a 30% loss. For those that are not too greedy, 22.4% over 19 months isn't at all bad and look at the safety that goes along with it.
Way too many people think of options are risky or little things to be used in "mad money" plays such as taking fliers on short-term, out-of-the-money calls, etc.
But there are strategies with options that are a lot safer than even buying and holding the stock and this is one such strategy.
By the way, for those a little more risk-tolerant, here are the annualized returns on other Jan. 2013 INTC naked put investments if the stock holds above 111% of the strike price on a closing basis:
25.4% annualized for the 15 strikes 19.3% annualized for the 12.50 strikes 14.0% annualized for the 10 strikes 10.0% annualized for the 7.50 sttikes
Yes indeed - 10% annualized for INTC 7.50 strikes. Can you believe it? But it's true. However, the transaction must be done at my brokerage and cash must be used as collateral for the above returns.