Commit To Purchase Star Scientific At $1, Earn 30%

Investors considering a purchase of Star Scientific, Inc. ( STSI) stock, but cautious about paying the going market price of $1.40/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the January 2015 put at the $1 strike, which has a bid at the time of this writing of 30 cents. Collecting that bid as the premium represents a 30% return against the $1 commitment, or a 18.2% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

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Selling a put does not give an investor access to STSI's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. And the person on the other side of the contract would only benefit from exercising at the $1 strike if doing so produced a better outcome than selling at the going market price. ( Do options carry counterparty risk? This and six other common options myths debunked). So unless Star Scientific, Inc. sees its shares decline 29.1% and the contract is exercised (resulting in a cost basis of $0.70 per share before broker commissions, subtracting the 30 cents from $1), the only upside to the put seller is from collecting that premium for the 18.2% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for Star Scientific, Inc., and highlighting in green where the $1 strike is located relative to that history:

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The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the January 2015 put at the $1 strike for the 18.2% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Star Scientific, Inc. (considering the last 249 trading day closing values as well as today's price of $1.40) to be 86%. For other put options contract ideas at the various different available expirations, visit the STSI Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Friday, the put volume among S&P 500 components was 1.23M contracts, with call volume at 1.39M, for a put:call ratio of 0.89 so far for the day, which is unusually high compared to the long-term median put:call ratio of .65. In other words, there are lots more put buyers out there in options trading so far today than would normally be seen, as compared to call buyers.

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