NB: NS trades are not for beginners. Sit down with pencil and paper to work these out, or you can make an expensive mistake.
* * *
I sold 2 contracts of Jan $80 RIG puts for $17.05. The unusually large option premium (21%!) is because this is a non-standard (NS) option. An event occurred which resulted in these shares trading in an unusual package. Usually, one contract is a promise to buy or sell a package of 100 shares at the strike price. In this case, the package is "$2314.38 cash in lieu of shares, 47 shares of RIG." Non-standard options are indicated by NS in the Option Chain screen.
The discussion below uses just one contract as an example, for the sake of simplicity.
I have still put up $80 * 100 = $8000 per contract to secure the puts. The possible outcomes are:
a) RIG is trading above $80 on the January 2010 expiration date. I keep the $17.05 premium, and get the cash securing my put back, for a 21% gain in approximately a month.
b) RIG is trading at or below $80 on the expiration date. I purchase 47 shares of RIG at $80 a share, and "purchase" $2314.38 cash. That would mean I was trading $8000 for $6074; uh-oh.
However, the net picture is better than it appears for b).
Remember the option premium. I'm paid $17.05 per share or $1705 total for writing this put. The total value of the property I end up with varies depending on the value of the stock at expiration. I consider RIG to be one of my core holdings--I already have 2.5% of my portfolio in it, and plan to make that 5%. These two contracts, each conveying 47 shares of RIG, will do that if exercised.
The total value of b) is $1705 + (47 * RIG) + $2314.38. I'm paying $8000 for this package, so $1705 + (47 * RIG) + $2314.38 = $8000. Solve for x (in this case, RIG, the market value of the stock). I will break even on b) when RIG is trading for $84.69 or above.
Naturally, if RIG tanks, or even stagnates for a significant period of time, I'll stay in the red on possibility b). That's why this NS option is trading for such a high premium, but it's also the reward that makes this risk worth taking.
