Commit To Buy Smith & Wesson Holding Corp At $8, Earn 11.2% Using Options

Investors eyeing a purchase of Smith & Wesson Holding Corp ( SWHC) shares, but cautious about paying the going market price of $11.33/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the January 2016 put at the $8 strike, which has a bid at the time of this writing of 90 cents. Collecting that bid as the premium represents a 11.2% return against the $8 commitment, or a 5.2% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

Top YieldBoost Puts of the S&P 500 »

Selling a put does not give an investor access to SWHC'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 $8 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 Smith & Wesson Holding Corp sees its shares fall 29.3% and the contract is exercised (resulting in a cost basis of $7.10 per share before broker commissions, subtracting the 90 cents from $8), the only upside to the put seller is from collecting that premium for the 5.2% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for Smith & Wesson Holding Corp, and highlighting in green where the $8 strike is located relative to that history:

If you liked this article you might like

7 Bargain-Basement Stocks That Could Rebound in 2017

This Year's Jewels in Last Year's Junk

Gun Stocks Are a Risky Play in 2017 -- Here's Why

Jim Cramer's 'Mad Money' Recap: Don't Worry About a Little Market Detour

'Mad Money' Lightning Round: Wynn Resorts vs. MGM, Ford vs. General Motors