As an example of this view I just sold naked puts in General Electric (NYSE: GE), the only original Dow Jones Industrial Average stock for January 2011 at a strike price of $2.50, and collected $0.52, per share. My break even therefore is $1.98, not counting the interest over what is almost a two-year term. Or looking at it another way, I got paid 20% on my money.
From my perspective I am simply making a bet that GE will still be in business in two years. Even losing it's AAA rating and cutting it's dividend does not portend this kind of dour outlook.
Although I made the trade, it does cause me to take pause and ask myself if is it possible that the economy will not only 'not recover', but might be worse three years out? That is a scary thought! If things get that bad I am wondering out loud today -- Will we be eating out of trash cans?
We have already witnessed many pedigreed companies collapse in the last twelve months. Who would have imagined two years ago that the largest insurance company in the world American International Group (NYSE: AIG), the largest bank in the world Citigroup Inc. (NYSE: C) and the largest automobile company in the world General Motors (NYSE: GM) would all be facing bankruptcy today?
In a recent poll, see: Should Buffett & Roubini "Face the Nation"? slightly over 50% of the respondents answered they thought the economy would be improved by December 31, 2010.
Today I push the question out further.
|Yes, you found money in the street||289 (73.7%)|
|No, we may be eating out of trash cans||103 (26.3%)|
Other options trades I have made recently: Investor fear puts me 'naked' on Wall Street and Chasing Value: Has BNI become 'Berkshire' Northern Santa Fe
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of GE and have open options as well.