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Monday, September 29, 2014

Established a 100% Cash-Secured Put Position in Baidu Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in Baidu Inc. ADR (Ticker Symbol BIDU) with an Oct2014 expiration and at the $215.00 strike price.  As detailed below, this investment will provide a +2.2% absolute return in 20 days (which is equivalent to a +40.8% annualized return) if Bidu closes at or above $215.00 at options expiration on Oct 18th.

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

Baidu Inc. (BIDU)
The transaction is as follows:
09/29/2014 Sold 1 Oct2014 $215.00 Put @ $4.90
Note: The price of Baidu was $218.99 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 one Put option sold.

A possible overall performance result (including commissions) for this Baidu transaction would be as follows:
100% Cash-Secured Cost Basis: $21,500.00 = $215.00*100
Note:  the price of BIDU was $218.99 when the Put option was sold.

Net Profit:
(a) Options Income: +$480.30
= ($4.90*100 shares) - $9.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BIDU closes above $215.00 at Oct2014 expiration): +$0.00
= ($215.00-$215.00)*100 shares

Total Net Profit (If BIDU is above $215.00 strike price at Oct2014 options expiration):+$480.30 
= (+$480.30 +$0.00 +$0.00)

Absolute Return (If BIDU is above $215.00 at Oct2014 options expiration and Put option thus expire worthless): +2.2%
= +$480.30/$21,500.00
Annualized Return (If BIDU is above $215.00 at expiration): +40.8%
= (+$480.30/$21,500.00)*(365/20 days)

The downside 'breakeven price' at expiration is at $210.10 ($215.00 - $4.90), which is 4.1% below the current market price of $218.99.
The 'crossover price' at expiration is $223.89 ($218.99 + $4.90).  This is the price above which it would have been more profitable to simply buy-and-hold Baidu Inc. stock until October 18th (the Oct2014 options expiration date) rather than holding this short Put option.