Friday, January 27, 2012

Sold 100% Cash-Secured Puts -- Mylan Inc.

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Mylan Inc. (MYL) with a Feb2012 expiration.

Mylan Inc. is a leading manufacturer of generic pharmaceutical products in finished tablet, capsule and powder dosage forms. MYL markets more than 1,000 products throughout the world with sales from: North America 53%, Europe 33%, and Asia/Pacific 14%. Generics account for about 90% of total revenues, with specialty products representing the balance.

With a virtual oligopoly of vertically integrated worldwide generic manufacturers, Mylan is well-positioned to capture a significant share of new generics -- and the prognosis for the future growth of prescription generic drugs remains very healthy. There are three primary reasons for this:
(1) Patents for many lucrative branded drugs will be expiring over the next few years;
(2) Aging populations in most countries result in increased prescription drugs usage; and
(3) Governments' efforts to control healthcare costs favor generics.
Importantly, these three factors are forecasted with great certainty, which provides a high level of confidence in the outlook for the generic drugs industry.
Also, although there is already widespread penetration of generics (versus branded drugs) in the U.S., a greater growth opportunity awaits Europe, and an even greater opportunity exists in Asia and elsewhere throughout the world.

Mylan is very attractive at its current price. With the expected 2011 earnings at $2.00 per share and an options exercise price of $20, the P/E ratio is 10. But the earnings growth rate for each of the next 3 years is likely to be in the teens. So, the PEG (Price-Earnings Growth) Ratio is significantly below 1.0, which makes Mylan a very attractive investing opportunity now.

Mylan Inc. (MYL) -- New Position
The transaction was as follows:
01/27/2012 Sold 7 Mylan Inc. (MYL) Feb2012 $20.00 Put Options @ $.41
Note: the price of MYL stock was $20.92 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 seven put options sold. A possible overall performance result(including commissions) for this Mylan Inc. (MYL) transaction would be as follows:
100% Cash-Secured Cost Basis: $14,000.00
= $20.00*700

Net Profit:
(a) Options Income: +$272.80
= ($.41*700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MYL stock above $20.00 at Feb2012 expiration): +$0.00
= ($20.00-$20.00)

Total Net Profit(If stock price above $20.00 at Feb2012 options expiration): +$272.80
= (+$272.80 +$0.00 +$0.00)

Absolute Return (If stock price above $20.00 at Feb2012 options expiration and put options thus expire worthless): +1.9%
= +$272.80/$14,000.00
Annualized Return (If stock price above $23.00 at expiration): +32.3%
= (+$272.80/$14,000.00)*(365/22 days)

The downside 'breakeven price' at expiration is at $19.59 ($20.00 - $.41).
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 Mylan Inc. cash-secured puts position is 69.7%. This compares with a probability of profit of 50.9% for a buy-and-hold of Mylan over the same time period.

The 'crossover price' at expiration is $21.33 ($20.92 + $.41).
This is the price above which it would have been more profitable to simply buy-and-hold Mylan stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the short put options.