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.||30 (38.5%)|
|Even money bet, but not worth the unknowns.||21 (26.9%)|
|Playing with matches in the dynamite factory.||27 (34.6%)|
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.