ARS,
I find that .OHDMB (Jan 03 10's) have a bid-ask of $3.10-$3.50, with 10 contracts having traded Friday with a closing price of $3.10. Is it correct to read this that I could sell a cash covered put at 10 for $310, which would obligate me to keep $1,000. in cash until Jan 03 on the chance that the stock was put to me?
Yes, assuming your account requires short puts to be backed by cash. In a margin account you might have to keep only the $310 you collected plus a small percentage of the stock price, typically 10% to 20% depending on how far ITM or OTM the option is.
If so, is the rational of the buyer of those 10 contracts that traded Friday that NTAP will be trading at less than $6.90 18 months out, and that it is worth paying $310 now on the strength of that conviction?
This is one possibility, but not the only one. The "active" participant in this trade might have been the seller, with the "passive" option specialist taking the long side. The specialists have ways of hedging all the transactions they complete, so he does not have to rely on the stock going down. Another possibility is that the active participant is bullish on the stock and opened a put credit spread. For example, he might have bought the 2003JAN10 and sold the 2003JAN20 for a net credit of about $650, hoping that by expiration time the stock will be above $20 so both puts will expire worthless and he can keep the full $650. To carry this position he needs enough cash to cover the worst possible loss. If the stock closes below $10 he must pay out $1000 (buy at $20 and sell at $10), so he needs $350 in addition to the $650 collected. The potential return is 650/350 or 185% over 18 months. The breakeven point is $13.50, slightly below the current price.
Dan |
