Today, I sold a Jan 2012 $170 put on GS for $3,970.48 in premium (including commissions), which adds to my current long position in GS stock. The break-even point of the put sale come Jan 2012 expiration is roughly $130, and the max-profit point is $170. Assuming the put finishes out of the money, I will have generated a real return on the cash required for exercise of approximately 30% over about a year and a half. If GS stays flat and finishes at $147.50 at Jan 2012 option expiration, the put would be exercised and I'd have generated a return of around 13% on the cash required for exercise.
Yesterday, GS announced a settlement of their SEC fraud suit in connection with their role in the synthetic collateralized debt obligation hand crafted by credit default buyer and hedge fund manager John Paulson. The settlement removes much of the uncertainty surrounding GS's future. While the ultimate impact of the financial regulatory reform bill is yet to be seen, GS's current price reflects a very pessimistic forecast for the company's profit potential over the coming years. With the SEC suit out of the way and many of GS competitors hampered if not gone forever, I think GS at today's prices will outperform the market over the coming years.
By selling a long term in-the-money put I am utilizing leverage, but it's an amount of leverage I'm comfortable maintaining given the cash portion of my portfolio (and the fact that I continue to deposit additional cash into the account). When using options, I look for opportunities to capitalize on non-recourse leverage, zero (or profitable, negative cost leverage) and sometimes both. A long term naked put sale is certainly recourse leverage so should be entered into with caution, but can offer an opportunistic investor a chance to benefit from zero-cost or in this case, profitable, negative cost, leverage through time decay. Note that with this put sale, GS can now be considered the second largest position in the portfolio.
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