I'm an options newbie, but feel that I have a reasonable understanding after
reading McMillans "Options as Strategic Investments", which is a great book
and I highly recommend it.
After reading the section on bull put spreads, I did a little research into put
option prices on companies I'm bullish on to compare the opportunities against
the examples in the book and against McMillans evaluation criteria. I examined
the data for the following companies: Western Digital, Intel, Microsoft,
DuPont, and Phillip Morris. For each company I examined the historical price
data and tried to estimate what the price would be if each stock continued to
perform in the next 4 months as they had for the past 4, and I examined the put
prices for expiration in October ( December in MO's case ) at both the
estimated price and the current price. My strategy is to find the stock and put
options which provide the best reward/risk ratio and the most reasonable break
even point.
Microsoft, far and away, seems to have the best potential. If it continues to
perform in the next 4 months as it has in the past 4, it would be in the ~165
range by expiration of October options on the 17th. If you sell OCT 150 puts
and buy OCT 130 puts, priced 22 3/4 and 8 3/4 currently, you would receive
$1400 per options pair, be risking $600, have a collateral requirement of $600,
and a break even point of 136. As an example, if you did this with 5 pairs (
which is the most I would consider risking at this time ) you would risking
$3000, and be receiving $7000, and have a collateral requirement of $3000, and
of course still have a break even point of 136. I'm ommiting commissions here
because every broker will charge differently, and I leave it to you to add the
commission charges into this scenario. Now of course, if Microsoft closes at or
below 130 you end up owing $10000 ( the $7000 received from the transaction,
and the $3000 at risk); if it closes between 130 and 136 you will owe more than
$7000 and will lose some of the $3000 at risk; if it closes above 136 but below
150 you will keep some of the $7000; and if it closes above 150 you keep the
entire $7000.
Now here's what I'm looking for:
1. Some option experienced critics out there to point out why this would never
work, or what I'm missing from this scenario, or a better opportunity, or
something.
2. If it will work, someone recommend me a broker who will allow a newbie to
place this order, because Schwab won't let me do anything other than covered
options for at least 6 months due to my lack of options experience! |
