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Tuesday, December 9, 2014

Established a 100% Cash-Secured Puts Position in AT&T Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in AT&T Inc.(Ticker Symbol T) with a Jan2015 expiration and at the $32.00 strike price.  As detailed below, this investment will provide a +2.0% absolute return in 40 days (which is equivalent to a +18.5% annualized return) if AT&T closes at or above $32.00 at options expiration on January 16th.

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

AT&T Inc. (Symbol T)
The transaction is as follows:
12/09/2014 Sold 4 out-of-the-money Jan2015 $32.00 Put options @ $.68
Note: The price of AT&T was $32.77 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 result (including commissions) for this AT&T transaction would be as follows:
100% Cash-Secured Cost Basis: $12,800.00 = $32.00*400
Note:  the price of AT&T was $32.77 when the Put options were sold.

Net Profit:
(a) Options Income: +$260.05
= ($.68*400 shares) - $11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AT&T closes above $32.00 at the Jan2015 options expiration): +$0.00
= ($32.00-$32.00)*400 shares

Total Net Profit (If AT&T is above $32.00 strike price at Jan2015 options expiration): +$260.05 
= (+$260.05 +$0.00 +$0.00)

Absolute Return (If AT&T is above $32.00 at Jan2015 options expiration and Put options thus expire worthless): +2.0%
= +$260.05/$12,800.00
Annualized Return (If AT&T is above $32.00 at expiration): +18.5%
= (+$260.05/$12,800.00)*(365/40 days)

The downside 'breakeven price' at expiration is at $31.32 ($32.00 - $.68), which is 4.4% below the current market price of $32.77.
The 'crossover price' at expiration is $33.45 ($32.77 + $.68).  This is the price above which it would have been more profitable to simply buy-and-hold AT&T Inc. stock until January 16th (the Jan2015 options expiration date) rather than holding this short Puts option position.
Note: the stock price will decrease by the amount of the quarterly dividend upon the opening of the market on the ex-dividend date.  Although the quarterly dividend for Jan2015 has not yet been declared, it is likely that the ex-div date will be January 6th and the amount will be approximately $.46.