Put Returns
In our example for Macron Technology, suppose a put option is also available with a premium of $2.50. Calculate your percentage return for the three month holding period if the stock price declines to $47 per share. What is your annualized return? One put contract costs $250, so you can buy 40 of them. Notice that your 40 contracts give you the right to sell 4,000 shares at $50 per share.
If, in three months, Macron is selling for $47, your put options are worth $50
$47 = $3 each. You control 4,000 shares, so your options are worth 4,000 shares X $3 = $12,000 total. You invested $10,000, so your dollar return is $12,000 $10,000 = $2,000, and your percentage return is $2,000/$10,000 = 20%.
To annualize your return, we need to compute the effective annual return, recognizing that there are 4 three month periods in a year:
1 + EAR = 1.20 4
1 + EAR = 2.0736
EAR = 1.0736 = 107.36 %
Your annualized return is thus about 107 percent.