45 lines
1.5 KiB
Plaintext
45 lines
1.5 KiB
Plaintext
t,r 19: The Sale of a Put
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ILE 19-2.
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297
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lculation of the potential return of uncovered put writing.
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50
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4
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less commissions
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Potential maximum profit (premium received)
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Striking price
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Less premium per put ($1,925/5)
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Break-even stock price
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Collateral required (allowing for stock to drop to 43):
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20% of 43
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Plus put premium
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Requirement for 5 puts
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Less premium received
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Net collateral
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Potential return:
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Premium divided by net collateral
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$2,000
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75
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$1,925
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$50.00
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3.85
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46.15
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$ 860
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+ 700
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$1,560
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X 5
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$7,800
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- 1,925
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$5,875
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$1,925/$5,875 = 32.8%
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There are differences of opinion on how to compute the potential returns from
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naked put writing. The method presented above is a more conservative one in that it
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takes into consideration a larger collateral requirement than the initial requirement.
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Of course, since one is not really investing cash, but is merely using the collateral
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value of his present portfolio, it may even be correct to claim that one has no invest
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ment at all in such a position. This may be true, but it would be impossible to com
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pare various put writing opportunities without having a return computation available.
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One other important feature of return computations is the return if unchanged.
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If the put is initially out-of-the-money, the return if unchanged is the same as the
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maximum potential return. However, if the put is initially in-the-money, the compu
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tation must take into consideration what the writer would have to pay to buy back the
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put when it expires. |