For the first time my annual picks will include a stock option. I have written numerous blogs this year about something called "naked puts" -- that is a sell to open put position -- committing me to buy a certain number of shares by a certain date if the closing price is less than the strike price.
In this case I have selected the E*TRADE (ETFC) January 2011, $2.50 puts last traded on December 28, 2009 at $0.97 for a 39% return. If it expires, as I am betting it will, by the third Friday of that month I have no further obligation.
This type of option transaction is not available to most investors. It is marginable, but you pay no interest.
Since you receive the cash on the day of the initial transaction, I will add a 4% dividend yield as if I invested the cash in a broad bond market index fund for the year, prorated at the time of each periodic review. Therefore I actually have the potential to make over a 43% return when you add the dividend on the up front cash, and reinvest it during the year as well.
E-TRADE ended the trading day, December 28, 2009 at $1.78. The break even on this trade is $1.53 ($2.50 minus 0.97) plus the interest gain for the year holding period.
For the other nine picks see Chasing Value: 10 Stock Picks for 2010.
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 ETFC options.