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Wednesday, March 14, 2012

Sold 100% Cash-Secured Puts -- Potash Corp

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Potash Corp of Saskatchewan Inc.(Symbol POT) with an Apr2012 expiration.

The transaction was as follows:
03/14/2012 Sold 3 Potash Corp (POT) Apr2012 $42.50 Put Options @ $1.62
Note: the price of POT was $42.58 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.

A possible overall performance results(including commissions) for this Potash Corp (POT) transaction would be as follows:
100% Cash-Secured Cost Basis: $12,750.00
= $42.50*300

Net Profit:
(a) Options Income: +$474.80
= ($1.62*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If POT above $42.50 at Apr2012 expiration): +$0.00
= ($42.50-$42.50)*300

Total Net Profit(If POT above $42.50 at Apr2012 options expiration): +$474.80
= (+$474.80 +$0.00 +$0.00)

Absolute Return (If POT above $42.50 at Apr2012 options expiration and Put options thus expire worthless): +3.7%
= +$474.80/$12,750.00
Annualized Return (If stock price above $42.50 at expiration): +35.8%
= (+$474.80/$12,750.00)*(365/38 days)

The downside 'breakeven price' at expiration is at $40.88 ($42.50 - $1.62).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Apr2012 options expiration) for this Potash Corp.(POT) cash-secured Puts position is 67.5%. This compares with a probability of profit of 51.3% for a buy-and-hold of POT over the same time period.

The 'crossover price' at expiration is $44.12 ($42.50 + $1.62).
This is the price above which it would have been more profitable to simply buy-and-hold POT until Apr 17, 2012 (the Apr21st 2012 options expiration date) rather than holding the short Put options. The probability of exceeding this crossover price at expiration is 37.0%.

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