I am wondering if a systematic process of writing deep value puts could be done successfully. We define deep value stocks here as stocks which are undervalued to their intrinsic or tangible book values. Consider the case of Blackberry (NASDAQ:BBRY):
Recently the stock has been selling around $8.25, below the Tangible Book Value(TGBV) of $9.38/share. Interest in covered puts extends all the way down to $4/share, or just 43 cents for one dollar of TGBV. I recently wrote 5 covered puts for December at the $4 price for a sum of $38. Obviously, this is not a lot of money, but I think this might be a viable way to earn interest on my cash with almost no risk.
If Blackberry plunges below $4/share it will almost certainly be worth more. The company is sitting on piles of cash with almost no debt. I would love to get into this stock at such a low price. The company may not be a going concern, but the breakup value will be more than $4.
If Blackberry does not drop below $4/share by December then I will have made a 1.9% return on cash which is basically sitting idle anyway. The strategy matters here a bit. I always try to keep between 5-10% of my portfolio in cash. Lately, it’s been hard to find many good places to put it, and I actually plan to take gains on a few other positions. So if my cash is reserved in case of a major plunge, why not write puts to employ it for a plunge now? The theory is probably sounder than the reality. The problem I have with puts/calls is timing. Writing puts, you only get to buy the stock when the put owner is willing to sell. Blackberry might plunge below $4 in a panic, but it will not stay there. Still, perhaps by splitting purchases between covered puts and limit orders, one could eke out a slightly higher return at very little risk.
Half of my initial planned purchase of Smith & Wesson (NASDAQ:SWHC)is employed in a similar manner. I would love to get into the company under $10/share, and hope that my put holder exercises their right to sell me the shares under $10.
This is definitely something I want to research further.