Commit To Buy Federal Mogul Corp. At $15, Earn 11.6% Annualized Using Options

Investors considering a purchase of Federal Mogul Corp. (FDML) shares, but tentative about paying the going market price of $18.42/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the April 2014 put at the $15 strike, which has a bid at the time of this writing of 85 cents. Collecting that bid as the premium represents a 5.7% return against the $15 commitment, or a 11.6% 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 FDML'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 $15 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 Federal Mogul Corp. sees its shares fall 17.5% and the contract is exercised (resulting in a cost basis of $14.15 per share before broker commissions, subtracting the 85 cents from $15), the only upside to the put seller is from collecting that premium for the 11.6% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for Federal Mogul Corp., and highlighting in green where the $15 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 April 2014 put at the $15 strike for the 11.6% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Federal Mogul Corp. (considering the last 250 trading day closing values as well as today's price of $18.42) to be 64%. For other put options contract ideas at the various different available expirations, visit the FDML Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Wednesday, the put volume among S&P 500 components was 1.01M contracts, with call volume at 1.01M, for a put:call ratio of 0.71 so far for the day, which is above normal compared to the long-term median put:call ratio of .65. In other words, if we look at the number of call buyers and then use the long-term median to project the number of put buyers we'd expect to see, we're actually seeing more put buyers than expected out there in options trading so far today. Find out which 15 call and put options traders are talking about today.

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