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Tuesday, January 24, 2012

Sold 100% Cash-Secured Puts -- Market Vectors Gold Miners ETF

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Market Vectors Gold Miners ETF (Symbol GDX) with a Feb2012 expiration.

The transaction was as follows:
01/24/2012 Sold 3 Market Vectors Gold Miners ETF (GDX) Feb2012 $52.00 Put Options @ $1.58
Note: the price of GDX was $51.99 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 Market Vectors Gold Miners ETF (GDX) transaction would be as follows:
100% Cash-Secured Cost Basis: $15,600.00
= $52.00*300

Net Profit:
(a) Options Income: +$462.80
= ($1.58*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GDX price unchanged at $51.99 and thus assigned at $52.00 at expiration): -$11.95
= ($51.99-$52.00)*300 - $8.95 commissions
(c) Capital Appreciation (If GDX above $52.00 at Feb2012 expiration): -$8.95
= ($22.00-$22.00) -$8.95 commissions

Total Net Profit(If GDX price unchanged at $51.99): +$450.85
= (+$462.80 +$0.00 -$11.95)
Total Net Profit(If GDX above $52.00 at Feb2012 options expiration): +$453.85
= (+$462.80 +$0.00 -$8.95)

1. Absolute Return if Unchanged at $51.99: +2.9%
= +$450.85/$15,600.00
Annualized Return If Unchanged (ARIU): +42.2%
= (+$450.85/$15,600.00)*(365/25 days)

2. Absolute Return (If GDX above $52.00 at Feb2012 options expiration and put options thus expire worthless): +2.9%
= +$453.85/$15,600.00
Annualized Return (If stock price above $22.00 at expiration): +42.5%
= (+$453.85/$15,600.00)*(365/25 days)

The downside breakeven price at expiration is $50.42 ($52.00 - $1.58).
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 Market Vectors Gold Miners ETF position is 67.3%. This compares with a probability of profit of 51.0% for a buy-and-hold of GDX over the same time period.

The upside crossover price at expiration is $53.58 ($52.00 + $1.58).
This is the price above which it would have been more profitable to simply buy-and-hold GDX until Feb 17, 2012 (the Feb2012 options expiration date) rather than selling the put options.

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