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  • fizrwinnr11 fizrwinnr11 Jun 18, 2011 3:44 PM Flag

    10-strike INTC naked puts expiring in Jan 2013

    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.

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    • MARGIN REQUIREMENTS are critical when it comes to what the returns will be on naked put investments. Most houses use the same formula for determining requirements but then they also have minimum requirements as well. With Ameritrade, they strictly follow the formula and do NOT impose minimums.

      At Fidelity for example, the minimum requirement per contract is 15% of the market value of the stock plus the ask price of the option.

      So for them, even if you are looking to sell a low strike like the 10's, their minimum requirement would be 15$ of $2,119 ($318) plus the $34 asked which is $352 per contract. So if an investor sells at the $31 bid and receives $30 per contract after commissions, the return would be 8.5% for 19 months or 5.4% annualized. That's not very exciting at all.

      But at my brokerage, they only require 10% of the strike plus the asked price of the option. So in the case of 10-strike naked puts, the requirements are just $100 plus $34 or $134. And $30 net premiums after commissions on just a $134 requirement is 22.4% over the 19 months or 14.0% annualized versus just 8.5% for 19 months at Fidelity or 5.4% annualized.

      14.0% with this kind of safety is outstanding whereas 5.4% annualized at the other house is no great shakes.

      The 10% of the strike price portion of the requirement holds as long as the stock continues to close at 111.25% or more of the strike. If the stock falls below that, requirements increase.

    • Annualized returns for other INTC strikes for Jan. 2013:

      14.0% for the 10's
      19.3% for the 12.50's
      25.4% for the 15's

 
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