As a trader with less than 25,000 in my broker account, I found many ideas that are normally inapplicable for me. So, I decided to research and write to share possible option trades with little money, relative low-risk and interesting returns after commissions.
This is my second article in this series of "options ideas for small investors". Obviously it is also applicable for people that want to invest more money. I analyze possible trades focusing on 3 basic conditions:
- Less than 1500 of margin required or cash
- No significant change in underlying stock price
- Annualized return greater than 50% over invested (or required margin), after commissions
I will use options spreads to manage risk and affect the lower account margin as I can. Note that using naked positions could be very profitable but it may seriously hurt your position and it also requires a huge margin from your account.
Nokia Corporation (NOK)
This Finnish corporation manufactures and sells mobile devices, and provides Internet and digital mapping and navigation services worldwide. Its Devices & Services segment develops and manages a portfolio of mobile devices; and services comprising applications and content.
The stock plummeted 56% in the last 13 months because of the bad results and market share lose, which was taken by Apple (NASDAQ:AAPL) and many other Google (NASDAQ:GOOG) Android OS based smartphones such as Samsung (OTC:SSNLF). Despite this, Nokia remains as a big player in the mobile phone market and its Microsoft (NASDAQ:MSFT) cooperation agreement can result very positive in the mid and long term.
Market cap for Nokia is 19.4B and its sales were nothing less than 51B. Fwd P/E ratio is 13.7 for analyst EPS consensus of 0.37. Nokia now trades 14.12% above its 52wk low and 42.62% below its 52wk high.
A conservative play could be selling Oct-12 5 Put for .85 and buying Oct-12 4 Put for .38
You will get a credit of .47 per spread. Supposing that you trade 6 contracts and assuming a 14.95 commission you will get a net income of 267.05 (your max gain) and you will assume a possible loss of 332.95. Your affected margin will be 600 so the possible return is 44.51% after 221 days (73.51% annualized). Following chart shows you possible results according to different stock prices at expiration date.
This spread is 2% ITM.
Pepsico Inc (PEP)
This company engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. It operates in four divisions: PepsiCo Americas Foods; PepsiCo Americas Beverages; PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa. The company was founded in 1898 and is headquartered in Purchase, New York.
I am bullish in PEP as I am on Coca-Cola (NYSE:KO), I believe that PEP has more upside potential than KO at current stock prices. Pepsi recently announced some restructuring measures like reducing 3% of the global work force; raising advertising and marketing expenses by $500 million to $600 million in 2012 on its iconic brands; and spending $100mn to improve its delivery and display racks.
Market Cap is 98.87B, sales ttm was 66.50B. P/E is now at 15.62 and Fwd P/E is 14.17 estimating next year EPS of 4.45 Profit margin is almost 10%.
PEP is trading -9.45% from its 52wk high and +9.60% from its 52wk low.
Average analyst´s target price for Pepsi is 69, which represents an upside potential of 9.4%
Trading a conservative spread would be as follows. Sell Jul-12 62.50 Put for 2.08 and buy Jul-12 60 Put for 1.22.
You will get a credit of .86 per spread. Supposing that you trade 3 contracts and assuming a 14.95 commission you will get a net income of 243.05 (your max gain) and you will assume a possible loss of 506.95. Your affected margin will be 750 so the possible return is 32.41% after 130 days (91% annualized). Following chart shows you possible results according to different stock prices at expiration date.
This spread is now 1% ITM.
Disclosure: I am long PEP.