Commit To Buy Smith & Wesson Holding Corp At $8, Earn 11.2% Using Options
Selling a put does not give an investor access to SWHC'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 $8 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 Smith & Wesson Holding Corp sees its shares fall 29.3% and the contract is exercised (resulting in a cost basis of $7.10 per share before broker commissions, subtracting the 90 cents from $8), the only upside to the put seller is from collecting that premium for the 5.2% annualized rate of return.
Below is a chart showing the trailing twelve month trading history for Smith & Wesson Holding Corp, and highlighting in green where the $8 strike is located relative to that history: