Saturday, July 26, 2014
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
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
Image Credit : www.techvibes.com