Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Hartford Financial Services Group Inc.(Ticker Symbol HIG) with a Feb2012 expiration.
The transaction was as follows:
01/30/2012 Sold 3 Hartford Financial Services Group Inc.(HIG) Feb2012 $18.00 Put Options @ $1.14
Note: the price of The Hartford was $17.28 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 three Put options sold.
Two possible overall performance results(including commissions) for this Hartford Financial Services Group Inc.(HIG) transaction would be as follows:
100% Cash-Secured Cost Basis: $5,400.00
(a) Options Income: +$330.80
= ($1.14*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HIG price unchanged at $17.28 at expiration): +$0.00
(c) Capital Appreciation (If HIG above $18.00 at Feb2012 expiration): +$207.05
= ($18.00-$17.28)*300 -$8.95 commissions
Total Net Profit(If HIG price unchanged at $17.28): +$330.80
= (+$330.80 options income +$0.00 dividends +$0.00 capital appreciation)
Total Net Profit(If HIG above $18.00 at Feb2012 options expiration): +$537.85
= (+$330.80 +$0.00 +$207.05)
1. Absolute Return if Unchanged at $17.28: +6.1%
Annualized Return If Unchanged (ARIU): +117.7%
= (+$330.80/$5,400.00)*(365/19 days)
2. Absolute Return (If HIG above $18.00 at Feb2012 options expiration and Put options thus expire worthless): +10.0%
Annualized Return (If stock price above $22.00 at expiration): +191.3%
= (+$537.85/$5,400.00)*(365/19 days)
The downside 'breakeven price' at expiration is at $16.86 ($18.00 - $1.14).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Hartford Financial Services Group Inc.(HIG) cash-secured Puts position is 60.8%. This compares with a probability of profit of 51.6% for a buy-and-hold of the Hartford over the same time period.
The 'crossover price' at expiration is $18.42 ($17.28 + $1.14).
This is the price above which it would have been more profitable to simply buy-and-hold Hartford stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the short Put options.