I said to let the stock drop more, and then select a $2.5 strike for a period of 1 - 2 months. Even a $0.05 credit on a 5 week, 2.5 strike, is about a 20 - 21% annualized return. Just depends on whether he is willing to wait and see, if the stock drops closer to $3 before initiating the $2.5 trade.
Has anyone mentioned commissions? Based on the link, it's a buck a contract for the opening transaction. Assumption: he's a beginner and trading a low number of contracts while he learns. http://www.optionshouse.com/rates/
Yeah, I was typing that when I refreshed and saw your post. I can't believe anyone is contemplating selling nickel puts to open.
When providing liquidity with 2 contracts on IB i regularly pay about 18 cents per contract or 36 cents total no min per trade. that's all-in nothing extra. unless i wasn't looking and the bid jumped up before i pressed submit, you would pay a penalty commission for hitting the bid. paying 18 cents on $20 ($.20 contract) in premium intake is about .9% of trade value. although not as low as stocks as % of trade still seems fair.
His trade would be cash secured, so reg T is irrelevant to the discussion. However, I again want to make it clear I do NOT like the trade. I don't like any companies trading below $10. Hence the reason 99% of my trades have strikes higher than $10. And my discussion obviously does not include the discussion of commissions, which will be potentially expensive for such a low strike trade. Thus the 28% return for his $3 strike and the 20% return for the $2.5 trade I discussed as an alternative, does not factor in costs. The only trade worse than selling a put on this stock, would be selling a put credit spread... due to the cost of the commission.
Yeah, but the return would be greater on RegT. You shouldn't use an annualized return as vol is not fixed (and numerous other reasons).
I use a more meaningful (realistic) method of interpreting annualized % return when selling a naked or cash secured put. I base it on the amount of potential cash used to buy the stock. Not merely the cash required for a margin requirement. The margin requirement method is how credit spreaders work the math. And it's just as accurate, if the stock remains above their strike, and if they put themselves on MASSIVE leverage. But it all falls apart when the stock trades between or below their strikes, and most are forced to close the trade for a loss.... because of that massive leverage. Meanwhile, the naked or cash secured put sellers, simply begin a new trade with the "same unit of cash", if the stock trades under their strike. For example, a covered call. The main problem with using the regT method for calculating the % return is,.... it's only "meaningful', if you put yourself on massive leverage. For example, if you only use 25% of your cash via regT, and you sit in cash with the other 75%..... while you may earn a pretend 30% return for each trade, your results at year end will end up considerably smaller than 30%. Closer to 8%. Therefore, those 30% regT results are somewhat "meaningless"..... unless you are actually on massive leverage throughout the year. The 2 reasons I prefer to "accurately and meaningfully" annualize my trades are,... for reasons of estabilishing a "minimum benchmark" per trade, before I risk my cash,... and to have an idea of how my year is going to end, as my trades progress through the year. That being, I don't want to earn 15% on each trade, only to end the year earning 10%. I'd rather earn that same 15% on each trade, and end the year earning 20% on my account value..... because of the limited and controlled degree of margin I put myself on. That's the problem credit spreaders have at year end. If they don't put themselves on MASSIVE margin through the year, they may earn 20% on each trade, but they then end the year earning closer to 7 - 8%. Hence my discussion about using a formula that is.... "meaningful".