Springtime Budget-Busters -- Savings Experiment
How I Squandered My Inheritance at Age 18
Earlier today, I posted Whose Best Interests Are Served If BP Is Pushed into Bankruptcy? where I disclosed having taken a position in BP p.l. c. (BP), and for better or worse my first test will be the market close on July 16, 2010.Over the past year, I have started reporting on various put options that I have been doing. In today's example, I sold to open BP at a July strike price of $22.50 (a naked put), receiving $0.50 per share.
My break even is $22.00, and the stock opened today at $27.65 with three weeks to go.
When I made the trade about two weeks ago, the stock was trading around $31.00. No telling where it will be in 20 days. I'm not worried about it but this is certainly not as strong a bet as it appeared when I did it. Today I could close the position if I had any great concern and would break even but I am going to let this ride.
If I was really confident, I could actually sell more puts and get the same money today I received two weeks ago. The reason I do not is simply spreading the risks I take, because once in a while I have been known to blunder. When I do that gets mentioned, too.
| Easy Money. | |
|---|---|
| Even money bet, but not worth the unknowns. | |
| Playing with matches in the dynamite factory. |
If you just fell out of the sky and looked at the metrics for BP you would marvel at the current yield (which it will not be paying) over 12%, the P/E under 5, the PEG under 1.0, rock bottom P/CF, P/S, and P/B and what appears to be manageable debt and so forth. It is not until you drill deeper (pun intended) that you find that you have Mr. Universe confidently holding a mere ten pound weight over his head -- who unfortunately is standing on quicksand.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares and options of BP.
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Reader Comments (Page 1 of 1)
6-28-2010 @ 4:05PM
john said...
I really doubt a broker authorized you to sell naked options.
6-28-2010 @ 4:50PM
Sheldon L said...
John,
You can verify with WellsTrade that they have six levels of required approvals for options trading and that level six approval is required to do naked puts.
Charles Schwab has four levels and again the highest level of approval is required.
As to whether I have that level of approval, you will have to take my word for it, however, I am quite sure my friends at the Wells Private Bank will find your doubts amusing.