Agree To Buy Microchip Technology At $37, Earn 6.3% Using Options
Selling a put does not give an investor access to MCHP'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 $37 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 Microchip Technology, Inc. sees its shares decline 14.3% and the contract is exercised (resulting in a cost basis of $34.65 per share before broker commissions, subtracting the $2.35 from $37), the only upside to the put seller is from collecting that premium for the 5.5% annualized rate of return.
Worth considering, is that the annualized 5.5% figure actually exceeds the 3.3% annualized dividend paid by Microchip Technology, Inc. by 2.2%, based on the current share price of $43.16. 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 14.33% to reach the $37 strike price.