Recently, I placed a limit order of $0.69 for a put option on Roger's Communications. This was a "sell to open" a put option, which means if the order goes through I am paid a premium. Since 1 contract represents 100 shares, I was paid $58.05 after commissions. I am paid a premium as I make a "promise" that I will buy 100 shares of RCI.B at the strike price of $44.00 if the stock price falls below $44.00 and it is assigned.
3 possible outcomes :
(1) If the stock goes up, I made $58.05 without putting up any money.
(2) If the stock goes sideways and the stock doesn't fall far enough, I made $58.05.
(3) If the stock goes down below the strike price of $44.00 and is assigned, then my cost basis is lowered.
What is my adjusted cost base if put is assigned?
ACB= # of contracts*100 shares*strike price - [option premium - option premium commission] +commission for option being assigned.
= 1*100*$44.00 -[$69.00 -$10.95]+$24.95
RCI.B currently pays an annual dividend of $1.83/share. YoC=1.83/43.6690=4.191%
How is this different if I bought the shares outright without an option?
Cost of 100 shares =$4400
Commission = $4.95
ACB/share = $44.05
YoC= 1.83/44.05= 4.154%
The yield on cost is greater where a put was sold and assigned over just buying the stock outright. This means my money is now working harder for me. Selling a put option allows me to get paid while I am waiting for the price of a stock to go down to a point that I am comfortable buying it. The other option is to but in a limit order to buy the stock at $44.00 and wait.
EDIT : In the section about if I bought shares outright, the commission is $4.95 instead of $9.95. My numbers above have been corrected.
NOTE: Selling puts is deemed to be risky, as the stock can go to zero or decrease in value really quick.