Unlike
many investments where the yields are simple and concrete,
yields from Naked Puts can be more difficult to figure,
and will vary from broker to broker, depending on his
margin requirements. The yields listed in our Naked Puts
section are calculated on a 30%+ margin requirement. Many
brokers' margin requirements are less than that, so your
yields could be even greater that listed.
Ameritrade
is one of the large online brokers and in their MARGIN
ACCOUNT HANDBOOK margin requirements are spelled out as
follows:
"The
writing of uncovered puts and calls requires an initial
deposit and maintenance of 100% of the current market
value of the contract plus 30% of the underlying stock
value less the out-of-the-money amount, if any, to a
minimum of the option market value plus 10% of the
underlying stock value."
This
rather complicated formula really isn’t that difficult
to understand. Basically, your broker will require 30% of
the stock price plus the cost of the option to sell a put
that is at the money. If the option is out of the money,
then they’ll give you credit for the out of the money
portion. Armed with that info we can calculate what the
yield would be if we were to sell various options.
Example:
Let’s say that ABC stock is selling at 42. It’s the
end of July and the August 40 Put is selling for 1 7/8. If
we wanted to sell the Aug 40 Put, our broker would require
on deposit the following funds: 30% of the stock price
(which equals $12.60) plus the cost of the option ($1.88),
minus the out of the money amount ($2.00) -- 12.60 + 1.88
– 2.00 = 12.48 Since one option is for 100 shares of the
underlying stock, then 12.48 * 100 = $1,248. Your broker
will require $1,248 cash or equities in your account to
sell 1 Jan 40 Put option. The premium you’d receive is 1
7/8 * 100 = $188. To figure your yield divide $188 by
$1248, and you get 15%. So as long as the stock price
remains above 40, you’d keep the entire premium and earn
15% in one month. This is a very lucrative from of
trading. When you compare it to buying options, it can be
safer as well. The stock would have to drop below 40 for
your yield to be less than 15%, and could drop all the way
to 38 1/8 and you’d still break even (commissions not
included).
