Peter D

Bucyrus: Significantly Undervalued

Paul,

Thanks for the very good article. I think you've forgot to include the margin requirement for the naked PUT sold. It could be up to 20% of the underlying price, plus the value of the naked PUT, i.e. typical margin requirement of 20% of $19 (stock price) plus $7.6 is about $11.4. So the cash outlay is $19,000 - $6,700 = 12,300 for the Covered Call, and $3,800 in margin for the naked PUT. The account would be credited $7,600 from the naked PUT, plus an additional $3,800 is hold as collateral. So the net cash outlay is $12,300 + $3,800 = $16,100. We can make a maximum of $14,300 from the call and put sold, which is 89%. In fact, the margin requirement for the stock is usually 33%-50%, so the profit can be higher.

One of the risk is that the naked PUT margin requirement increases as the price does down, so we might need more margin to cover this combination.