The Weekly Strategy Discussion is designed to assist individuals in learning how
options work and in understanding various options strategies. Options involve risk and are not suitable
for all investors. The strategies discussed are for educational and illustrative purposes
only, and should not be construed as an endorsement, recommendation or solicitation to buy or
sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.
CASH SECURED PUT
Example: Number Cruncher (NUCR) has rallied from $120 to $128.50 in the last month. You like the stock and would like to purchase shares at a lower price, around $120.
Outlook:You believe a pull back is possible and at that time you would then become a buyer.
Possible strategy:Cash Secured Put:
Write 1 September 120 put at $1.50
Invest $12,000 in money market fund (yield, 2%)
Net cash investment: $118.50 per share, or $11,850.
*All values shown are at the time of expiration. Commissions and other trading fees not included
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Results: Put Assigned
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Results: Put Expires
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Stock Change
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NUCR @ expiration
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Adjusted Cost of Stock if Put Assigned
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Net Profit/(Loss) if Put Assigned
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Value of Short 120 Put
|
Interest Earned
(50 days)
|
Net Profit/(Loss) if Put Expires
|
+1.17%
|
130.00
|
na
|
na
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$0.00
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$32.88
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$182.88
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+/- 0.00%
|
128.50*
|
na
|
na
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$0.00
|
$32.88
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$182.88
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-2.72%
|
125.00
|
na
|
na
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$0.00
|
$32.88
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$182.88
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-6.61%
|
120.00**
|
na
|
na
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$0.00
|
$32.88
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$182.88
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-7.78%
|
118.50***
|
$118.50
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$0.00
|
na
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$32.88
|
na
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-10.51%
|
115.00
|
$118.50
|
($350.00)
|
na
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$32.88
|
na
|
AT EXPIRATION: (9/19/08)
* Unchanged:Profit of $182.88
** Max Gain: $150.00 + $32.88 interest = $182.88 if NUCR > or = 120 (- 6.61%)
*** Break-even:NUCR at 118.50 (-7.78%)
Max Loss:Position has risk of owning shares of NUCR at $118.50 and all of the shares' risk from that price down.
na: Not applicable
IN SHORT: If shares of NUCR retrace their recent gains you purchase the stock for a net cost of $118.50. Otherwise, you earn a 1.5% return on your invested funds (11.1% annualized). Downside risk is stock ownership at $118.50.