Thursday, October 25, 2012

Established 100% Cash-Secured Puts -- United Continental Holdings Inc.

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in United Continental Holdings Inc.(Symbol UAL) with a Nov2012 expiration.

The transaction was as follows:
10/25/2012 Sold 10 United Continental Holdings Inc.(UAL) Nov2012 $19.00 Put Options @ $.48
Note: the price of UAL was $19.85 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 results(including commissions) for this UAL transaction would be as follows:
100% Cash-Secured Cost Basis: $19,000.00 = $19.00*1,000

Net Profit:
(a) Options Income: +$463.55
= ($.48*1,000 shares) - $16.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL above $19.00 at Nov2012 expiration): +$0.00
= ($19.00-$19.00)*1,000

Total Net Profit (If UAL remains above $19.00 at Nov2012 options expiration): +$463.55  = (+$463.55 +$0.00 +$0.00)

Absolute Return (If UAL above $19.00 at Nov2012 options expiration and Put options thus expire worthless): +2.4%
= +$463.55/$19,000.00
Annualized Return (If stock price above $19.00 at expiration): +37.1%
= (+$463.55/$19,000.00)*(365/24 days)

The downside 'breakeven price' at expiration is at $18.52 ($19.00 - $.48). Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Nov2012 options expiration) for this United Continental (UAL) cash-secured Puts position is 75.8%. This compares with a probability of profit of 51.2% for a buy-and-hold of UAL over the same time period.

The 'crossover price' at expiration is $20.33 ($19.85 + $.48). This is the price above which it would have been more profitable to simply buy-and-hold UAL until Nov 21st (the Nov2012 options expiration date) rather than holding the short Put options. The probability of exceeding this crossover price at expiration is 43.3%.