Sunday, March 1, 2009

Interesting Trade

I was talking to a friend Friday who's a pro. He walked me through the following trade that I'm pretty sure he put on last week.

Dell has about $4.40/share in cash with the stock trading at $8.50.

You could sell the January 2011 $10 put at the close Friday and take in $3.30 in premium.

If the stock goes up, you keep the $3.30.

If the stock goes below $7, you are effectively buying it at $6.70/share, or $2.30/share if you back out the cash. Even with business as bad as it is, Dell is expected to earn $1.34 this year. Who wouldn't want to buy Dell at less that 2x earnings?

I'm not saying you should do it but it's an interesting play.

1 comment:

timsmith said...

I currently have about 12 cents to invest and this seems like a strong play.