Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Marathon Petroleum Corporation (Ticker Symbol MPC) with a Sep2013 expiration and at the $70.00 strike price. As detailed below, this investment will provide a +3.6% absolute return in 38 days (which is equivalent to a +35.0% annualized return) if the stock closes at or above $70.00 at options expiration on Sept 20th.
This position was established because the MPC Aug2013 short Puts will likely expire tomorrow and the Covered Calls Advisor wants to retain a position in MPC. I agree with both Goldman Sachs and Credit Suisse that MPC is undervalued at its current price, however relatively conservative out-of-the-money Puts were sold because of the current stock market volatility. An open order was placed early this afternoon and was executed within the last 15 minutes prior to today's market close. This transaction along with a potential return-on-investment result are:
Marathon Petroleum Corp. (MPC)
The transaction is as follows:
8/15/2013 Sold 2 Sep2013 $70.00 Puts @ $2.60
Note: The price of MPC was $70.74 when this transaction was executed.
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 two Put options sold.
A possible overall performance results(including commissions) for this MPC transaction would be as follows:
100% Cash-Secured Cost Basis: $14,000.00 = $70.00*200
Note: the price of MPC was $70.74 when these Put options were sold.
(a) Options Income: +$509.55
= ($2.60*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MPC remains above $70.00 at Sep2013 expiration): +$0.00
= ($70.00-$70.00)*200 shares
Total Net Profit (If MPC is above $70.00 strike price at Sep2013 options expiration): +$509.55
= (+$509.55 +$0.00 +$0.00)
Absolute Return (If MPC is above $70.00 at Sep2013 options expiration and Put options thus expire worthless): +3.6%
Annualized Return (If MPC above $70.00 at expiration): +35.0%
= (+$509.55/$14,000.00)*(365/38 days)
The downside 'breakeven price' at expiration is at $67.40 ($70.00 - $2.60), which is 3.6% below the current market price.
The 'crossover price' at expiration is $73.34 ($70.74 + $2.60). This is the price above which it would have been more profitable to simply buy-and-hold MPC until Sep 20th (the Sep2013 options expiration date) rather than holding the short Put options.