32 lines
1.4 KiB
Plaintext
32 lines
1.4 KiB
Plaintext
216 • The Intelligent Option Investor
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Portfolio Management
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As we have discussed, the best percentage returns on short-put investments
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come from the sale of short-tenor ATM options. I find that each quarter there
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are excellent opportunities to find a fairly constant stream of this type of short-
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term bet that, when strung together in a portfolio, can generate annualized
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returns in the high-single-digit to low-teens percentage range. This level of
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returns—twice or more the yield recently found on a high-quality corporate
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bond portfolio and closer to the bond yield on highly speculative small com-
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panies with low credit ratings—is possible by investing in strong, high-quality
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blue chip stocks. In my mind, it is difficult to allocate much money to corpo-
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rate bonds when this type of alternative is available.
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Some investors prefer to sell puts on stocks that are not very vola-
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tile or that have had a significant run-up in price,
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4 but if you think about
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how options are priced, it is clear that finding stocks that the market
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perceives as more volatile will allow you to generate higher returns. Y ou
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can confirm this by looking at the diagrams of a short-put investment
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given two different volatility scenarios. First, a diagram in which implied
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volatility is low:
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Advanced Building Corp. (ABC)
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80
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70
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60
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50
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40
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30
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20
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5/18/2012 5/20/2013 249 499 749 999
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Date/Day Count
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Stock Price
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