The Price of Puts

Today I want to consider the case of put options. This is the price of the underlying security over the past six months:


I will start with a put that stays in-the-money over the whole period, MSQ-MX, with strike price $30. If I were to short MSFT at the beginning of September and cover in October, I would make a gain of (27.25-24.5)/24.5 = 11.22%, where I am neglecting the effect of the interest charged on my stock loan. A similar trade done using MSQ-MX would be done by buying the put and selling it for a profit later on. No actual shorting of MSFT stock would be needed. The yield would be in this case (5.5-2.8)/2.8 = 96.42%.


With MSQ-MT, strike price $29.5, I would get (5-2.5)/2.5 = 100%:


Using MSQ-MY, strike price $27.5, gives (3.25-1.1)/1.1 = 195%. The chart shows the price action during the periods this put goes in-the-money:


MSQ-MS, strike price $27, gives (2.8-0.8)/0.8 = 250%:


MSQ-MJ, strike price $25, with only a short period at-the-money, yields (1.3-0.3)/0.3 = 333%:


MSQ-MR, strike price $24,5, is almost always out-of-the-money, and yields (1.05-0.25)/0.25 = 320%:


MSQ-MX, strike price $22,5, is always out-of-the money and gives (0.375-0.1)/0.1 = 275%:



I see again in the case of puts that the best gain on a trade of this kind is obtained by picking a put that goes from out-of-the-money most to at-the-money.

The depreciation of puts follows a similar pattern to the one noted in the case of calls. It gets more pronounced to deeper out-of-the-money they are. Out-of-the-money puts behave quite like penny stocks as well.

Categories: stock options
Technorati Tags: stock options