Commit To Buy Radian Group At $10, Earn 8.5% Using Options

Investors considering a purchase of Radian Group, Inc. ( RDN) shares, but tentative about paying the going market price of $15.42/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 $10 strike, which has a bid at the time of this writing of 85 cents. Collecting that bid as the premium represents a 8.5% return against the $10 commitment, or a 4.7% 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 RDN'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 $10 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 Radian Group, Inc. sees its shares decline 35.3% and the contract is exercised (resulting in a cost basis of $9.15 per share before broker commissions, subtracting the 85 cents from $10), the only upside to the put seller is from collecting that premium for the 4.7% annualized rate of return.

Interestingly, that annualized 4.7% figure actually exceeds the 0.1% annualized dividend paid by Radian Group, Inc. by 4.6%, based on the current share price of $15.42. And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to fall 35.32% to reach the $10 strike price.

If you liked this article you might like

Doubt Is OK; The Lay of the Land: Doug Kass' Views

Here Is One of My Best Stock Ideas, Doug Kass Explains

Ulta Beauty, Radian Group, AllianceBerstein Holdings: 'Mad Money' Lightning Round

Perils of Politics: Cramer's 'Mad Money' Recap (Monday 7/31/17)

All the Rallying Big Bank Stocks Look Very Risky, Doug Kass Says