Saturday, July 26, 2014

Trade Update

This past month I sold a naked put in Roger's Communications Class B (RCI.B). The strike price was $42.00 and the premium I received was $68.00 before commissions. The premium was $57.0 after commissions. The expiry date was July 19, 2014. You can read about that here.

The option expired worthless, as RCI.B closed at $42.07 on Saturday July 19. I first entered this position on July 8, 2014.

Total Profit = $57.05

I can calculate my Return on Capital, or ROC, which is the ratio of the maximum potential profit (for a short position) to the amount of total capital used for that position. The total amount of capital used is approximately 20% of my break even. The break even for options is Strike price minus the Premium  This money is tied up while this trade is on.

Strike Price = $42.00
Premium = $57.05 after commissions
Break Even = $42.00*100-$57.05 = $4142.95

ROC= $57.05 / (0.20*$4142.95) = 6.89% 

This ROC is for 11 days. 

Annualized ROC = 6.89%*365.25/11
                             = 228.78%

The amount of capital required is less for an option than for a stock. If I was to purchase 100 shares of RCI.B at $42.00, the amount of capital required would be approximately $2100.00. So with selling the naked put option, my ROC is higher as less capital is tied up.

Disclosure : Long RCI.B

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     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

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