Commit To Buy MGIC Investment At $5.50, Earn 9.8% Using Options

Investors eyeing a purchase of MGIC Investment Corp. (MTG) stock, but cautious about paying the going market price of $8.21/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 $5.50 strike, which has a bid at the time of this writing of 54 cents. Collecting that bid as the premium represents a 9.8% return against the $5.50 commitment, or a 9% 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 MTG'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 $5.50 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 MGIC Investment Corp. sees its shares fall 32.8% and the contract is exercised (resulting in a cost basis of $4.96 per share before broker commissions, subtracting the 54 cents from $5.50), the only upside to the put seller is from collecting that premium for the 9% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for MGIC Investment Corp. , and highlighting in green where the $5.50 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 $5.50 strike for the 9% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for MGIC Investment Corp. (considering the last 251 trading day closing values as well as today's price of $8.21) to be 64%. For other put options contract ideas at the various different available expirations, visit the MTG Stock Options page of StockOptionsChannel.com.

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