Fri Dec 5, 2008: Selling Put Spreads on YHOO

With Yahoo stock (NASDAQ - YHOO, 11.66) still near its lows, and the overall stock market recovering broadly, now might be a good time to consider an aggressive put option writing strategy.

Chart of Yahoo stock

Selling put spreads could provide a 23.5% income in the next two weeks, as long as YHOO stock stays above $10 per share at expiration on Friday December 19th.

The spread is created by selling December 10 puts for income and buying the same quantity of December 9 puts to hedge, limit the risk, and reduce the margin requirement.

The margin requirement is $81 per spread with a net income of $19 per spread for a total return of 19 / 81 = 23.5% assuming both options expire worthless.

Because this is a low-priced spread, a large enough quantity must be traded to minimize the commission costs, or else the percentage income will be greatly reduced.

The breakeven point for this trade is $9.81 per share. The risk is a total loss of the margin deposit, $81 per spread, if the stock closes at 9 or below.

Until next time, best of luck with your option investments!