Thursday, February 16, 2012

Sold 100% Cash-Secured Puts -- ProShares UltraShort 20+ Year Treasury ETF (TBT)

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in ProShares UltraShort 20+ Year Treasury ETF (Ticker Symbol TBT) with a Mar2012 expiration.

The transaction was as follows:
02/16/2012 Sold 3 ProShares UltraShort 20+ Year Treasury ETF (TBT) Mar2012 $19.00 Put Options @ $.70
Note: the price of TBT was $18.94 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 ProShares UltraShort 20+ Year Treasury ETF (TBT) transaction would be as follows:
100% Cash-Secured Cost Basis: $5,700.00
= $19.00*300

Net Profit:
(a) Options Income: +$198.80
= ($.70*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TBT price unchanged at $18.94 at expiration): -$26.95
= ($18.94-$19.00)*300 - $8.95 commissions
(c) Capital Appreciation (If TBT above $19.00 at Mar2012 expiration): +$0.00
= ($19.00-$19.00)*300

Total Net Profit(If TBT price unchanged at $18.94): +$171.85
= (+$198.80 options income +$0.00 dividends -$26.95 capital appreciation)
Total Net Profit(If TBT above $19.00 at Mar2012 options expiration): +$198.80
= (+$198.80 +$0.00 +$0.00)

1. Absolute Return if Unchanged at $18.94: +3.0%
= +$171.85/$5,700.00
Annualized Return If Unchanged (ARIU): +36.7%
= (+$171.85/$5,700.00)*(365/30 days)

2. Absolute Return (If TBT above $19.00 at Mar2012 options expiration and Put options thus expire worthless): +3.5%
= +$198.80/$5,700.00
Annualized Return (If stock price above $19.00 at expiration): +42.4%
= (+$198.80/$5,700.00)*(365/30 days)

The downside 'breakeven price' at expiration is at $18.30 ($19.00 - $.70).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Mar2012 options expiration) for this ProShares UltraShort 20+ Year Treasury ETF (TBT) cash-secured Puts position is 66.9%. This compares with a probability of profit of 51.8% for a buy-and-hold of TBT over the same time period.

The 'crossover price' at expiration is $19.64 ($18.94 + $.70).
This is the price above which it would have been more profitable to simply buy-and-hold TBT until March 17, 2012 (the Mar2012 options expiration date) rather than holding the short Put options. The probability of exceeding this crossover price at expiration is 35.7%.

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