Just a double check?

Question

A buy write. Underlying symbol TMA. Long TMA 100 shares, writing 1 YLEMH. To keep it simple, use 13.70 as buy and 27.70 for write. Yes. it's a LEAP. Jan 40 2010 put. It does pay a dividend, next ex date in october, so....whatya think?

Answer 1

What you are describing would not normally be called a buy-write. The term buy-write usually is used to mean buying the stock and selling a covered call on the stock.

Also remember that the company, like other mortgage lenders, is experiencing financial difficulties. "The market" is betting that the dividend will be cut or eliminated. If the dividend was safe the stock would not be paying a 20% yield.

Another point to consider is that deep-in-the-money put options are usually exercised early, so it is quite possible that shortly after selling the put option you will be assigned and have to buy another 100 shares of TMA, this time for $40.00 per share. This is particularly likely if the dividend is eliminated. It is also most likely to happen right after the ex-date for a dividend.

I also think the odds of your getting the kind of price you quoted is low. As of Friday's close the stock was at $13.63 and the bid on the option was $26.50. Since $13.63 + $26.50 = $40.13 that would mean the option only had $0.13 of extrinsic value, while in your example you assmed $1.40 of extrinsic value priced into the option since $13.70 + $27.70 = $41.40.

Finally, I will mention that there is no such thing as a "LEAP" since "LEAPS" is an acronym and always includes the final "S" even if you are only talking about one contract.

It is not a trade I would be interested in making, but if you want to own 200 shares of the stock there is not a lot of reason not to do it.