This article appeared first on enhanced-investing.com(January 15, 2019) ------------------------------------------------------------------------------------------------------
Last week I finally closed a Short Put position on JM Smucker Co. (SJM) after a 42-day battle.
On November 30, the company closed at 104.51. My analysis told me
that it was slightly undervalued and I decided to sell a January 95 Put
for which I obtained a credit of $91. The broker froze a Buying Power of
$1,335.65 for me to carry this short position.
After that, the market went to s**t, and SJM was no exception.
SJM Price action (second half of 2018 – early 2019)
On December 27 SJM hit a low of $91.32. Now, here’s the power of
short Puts: At the close of Dec 27, the short January 95 Put was trading
at a mid price of 3.65 ($365). Remember I initially sold it at 0.91
($91). Therefore, my open loss at that point was $274. Contrast that
with the alternative scenario of having purchased 100 shares on November
30 at 104.51. I would have been losing more than a thousand dollars on
December 29.
SJM recovered little by little and last week (January 10) I finally
closed the short Put for 0.27 debit ($27). The profit was therefore $91 –
$27 = $64 dollars. On a $1,335.65 margin, that’s a +4.8% return on
margin. It may not sound like much, but make 4.8% on margin every 42
days for a year and we’re talking about a +41.6% annualized return.
On January 11, 2019 SJM closed at $102.19. The buyer of 100 shares on
November 30, not only suffered more during the correction, but he is
still losing money.
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