Monday, July 18, 2011

Sold Weekly 100% Cash-Secured Put Options -- Caterpillar Inc.

Normally, the Covered Calls Advisor sells monthly options. Today, for the first time, weekly 100% cash-secured put options were sold in the Covered Calls Advisor Portfolio(CCAP). In this instance, the cash-secured put was selected primarily as an experiment to see if any additional insights are gleaned by comparing this weekly put option duration against the monthly duration this advisor is accustomed to. The primary reason Caterpillar Inc. was selected for this Weekly option was because of the relatively high implied volatility in the options and thus the attractive option premiums they offer for a very short (4 trading days) time period. An important reason for the very high volatility is the fact that quarterly earnings will be released this Friday. This advisor expects earnings to exceed analysts' expectations, so a bullish in-the-money ($110 strike price) July 22, 2011 put option was selected today when the stock was selling at $106.86.

As you might recall from this article (link), this advisor has a personal preference that favors covered calls over cash-secured puts, despite the synthetic equivalence of these two strategies if they are established at the same moment in time, at the same strike price, and for the same expiration date. Along with evaluating the pros and cons of the weekly options vis-a-vis the monthlies, the pros and cons of selling 100% cash-secured puts (in lieu of the traditional covered calls) will also be part of the overall evaluation of this position when this investment is completed.


1. Caterpillar Inc. (CAT) -- New Position
Today, two Caterpillar Inc. (CAT) 100% cash-secured put options were sold in the Covered Calls Advisor Portfolio. The transaction was as follows:

07/18/2011 Sold 2 Caterpillar Inc. (CAT) Aug2011 $110.00 Puts @ $4.30
Note: the price of CAT stock was $106.86 today when these puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the two put options sold. Two possible overall performance results(including commissions) for the Caterpillar Inc. (CAT) transaction would be as follows:
100% Cash-Secured Cost Basis: $22,000.00
= $110.00*200

Net Profit:
(a) Options Income: +$849.55
= ($4.30*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $106.86 and thus stock assigned at $110.00 at expiration): -$636.95
= ($106.86-$110.00)*200 - $8.95 commissions
(c) Capital Appreciation (If FCX stock above $110.00 at July 22,2011 expiration): -$8.95 = ($106.10-$106.10) -$8.95 commissions

Total Net Profit(If stock price unchanged at $106.86): +$212.60
= (+$849.55 +$0.00 -$636.95)
Total Net Profit(If stock price above $110.00 at July 22,2011 options expiration): +$840.60
= (+$849.55 +$0.00 -$8.95)

Absolute Return if Unchanged at $106.86: +1.0%
= +$212.60/$22,000.00
Annualized Return If Unchanged (ARIU): +88.2%
= (+$212.60/$22,000.00)*(365/4 days)

Absolute Return (If stock price above $110.00 at Jul 22, 2011 options expiration and put options thus expire worthless): +3.8%
= +$840.60/$22,000.00
Annualized Return (If stock price above $110.00 at expiration): +348.7%
= (+$840.60/$22,000.00)*(365/4 days)

As always, your comments or questions/clarifications regarding this post are welcomed. Please click on the "comments" link below. If you prefer to remain anonymous, email me at the address shown in the upper-right sidebar.

Jeff

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