Commit To Buy NPS Pharmaceuticals At $23, Earn 13.5% Using Options

Investors considering a purchase of NPS Pharmaceuticals Inc. ( NPSP) shares, but tentative about paying the going market price of $35.63/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 $23 strike, which has a bid at the time of this writing of $3.10. Collecting that bid as the premium represents a 13.5% return against the $23 commitment, or a 6.8% 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 NPSP'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 $23 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 NPS Pharmaceuticals Inc. sees its shares fall 35.3% and the contract is exercised (resulting in a cost basis of $19.90 per share before broker commissions, subtracting the $3.10 from $23), the only upside to the put seller is from collecting that premium for the 6.8% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for NPS Pharmaceuticals Inc., and highlighting in green where the $23 strike is located relative to that history:

If you liked this article you might like

Mylan Bids $29 Billion for Perrigo in Latest Big Pharma Deal

Biotech Stocks Are Selling Off Just Like 2014 -- and That Might Be a Good Thing

Valeant Boosts Offer for Salix to $15.8 Billion, Endo Drops Bid

'Mad Money' Lightning Round: Ambarella Is Like Putting a Gun to Your Head

Jim Cramer's 'Mad Money' Recap: Zombie Stocks That Will Rise From the Dead