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Monday, August 19, 2013

Established a 100% Cash-Secured Puts Position in Citigroup Inc.

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Citigroup Inc. (Ticker Symbol C) with a Sep2013 expiration and at the $49.00 strike price.  As detailed below, this investment will provide a +2.3% absolute return in 34 days (which is equivalent to a +24.2% annualized return) if the stock closes at or above $49.00 at options expiration on Sept 20th.  The current Greek value of Delta for this option of 60% provides a good estimate of the probability that the stock price will be above the $49.00 strike price at Sep2013 options expiration. Thus, the resulting expected value of the annualized ROI for this investment is +14.5% = (+24.2%x.60).

Details of this transaction along with a potential return-on-investment result are: 

Citigroup Inc.(C)
The transaction is as follows:
8/19/2013 Sold 3 Sep2013 $49.00 Puts @ $1.14
Note: The price of Citi was $49.73 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 three Put options sold.

A possible overall performance results(including commissions) for this Citigroup transaction would be as follows:
100% Cash-Secured Cost Basis: $14,700.00 = $49.00*300
Note:  the price of C was $49.73 when these Put options were sold.

Net Profit:
(a) Options Income: +$330.80
= ($1.14*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If C remains above $49.00 at Sep2013 expiration): +$0.00
= ($49.00-$49.00)*300 shares

Total Net Profit (If C is above $49.00 strike price at Sep2013 options expiration): +$330.80 
= (+$330.80 +$0.00 +$0.00)

Absolute Return (If C is above $49.00 at Sep2013 options expiration and Put options thus expire worthless): +2.3%
= +$330.80/$14,700.00
Annualized Return (If C above $49.00 at expiration): +24.2%
= (+$330.80/$14,700.00)*(365/34 days)

The downside 'breakeven price' at expiration is at $47.86 ($49.00 - $1.14), which is 3.8% below the current market price of $49.73.
The 'crossover price' at expiration is $50.87 ($49.73 + $1.14). This is the price above which it would have been more profitable to simply buy-and-hold Citigroup until Sep 20th (the Sep2013 options expiration date) rather than holding these short Put options.