Commit To Buy Pacira Pharmaceuticals At $22.50, Earn 11.7% Annualized

Investors eyeing a purchase of Pacira Pharmaceuticals Inc. (PCRX) shares, but cautious about paying the going market price of $28.66/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the February 2014 put at the $22.50 strike, which has a bid at the time of this writing of $1.75. Collecting that bid as the premium represents a 7.8% return against the $22.50 commitment, or a 11.7% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

START SLIDESHOW:
Top YieldBoost Puts of the S&P 500 »

Selling a put does not give an investor access to PCRX'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 $22.50 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 Pacira Pharmaceuticals Inc. sees its shares fall 21.8% and the contract is exercised (resulting in a cost basis of $20.75 per share before broker commissions, subtracting the $1.75 from $22.50), the only upside to the put seller is from collecting that premium for the 11.7% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for Pacira Pharmaceuticals Inc., and highlighting in green where the $22.50 strike is located relative to that history:

Loading+chart++2013+TickerTech.com

The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the February 2014 put at the $22.50 strike for the 11.7% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Pacira Pharmaceuticals Inc. (considering the last 248 trading day closing values as well as today's price of $28.66) to be 38%. For other put options contract ideas at the various different available expirations, visit the PCRX Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Monday, the put volume among S&P 500 components was 1.73M contracts, with call volume at 2.01M, for a put:call ratio of 0.86 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.

null

More from Stocks

The Stock Market Has Every Reason to See a Fresh Rally

The Stock Market Has Every Reason to See a Fresh Rally

3 Simple Tips on Investing From TheStreet's Jim Cramer

3 Simple Tips on Investing From TheStreet's Jim Cramer

Video: There Are Some Big Changes Coming to the PGA Championships in 2019

Video: There Are Some Big Changes Coming to the PGA Championships in 2019

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly