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Tuesday, December 16, 2014

Established a 100% Cash-Secured Puts Position in Alibaba Group ADR

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in Alibaba Group ADR (Ticker Symbol BABA) with a Jan2015 expiration and at the $100.00 strike price.  As detailed below, this investment will provide a +2.5% absolute return in 33 days (which is equivalent to a +28.2% annualized return) if Alibaba closes at or above $100.00 at options expiration on January 16th.

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

Alibaba Group  (Ticker BABA)
The transaction is as follows:
12/16/2014 Sold 2 out-of-the-money Jan2015 $100.00 Put options @ $2.60
Note: The price of Alibaba stock was $105.51 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 Alibaba transaction would be as follows:
100% Cash-Secured Cost Basis: $20,000.00 = $100.00*200
Note:  the price of Alibaba was $105.51 when the Put options were sold.

Net Profit:
(a) Options Income: +$509.55
= ($2.60*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alibaba closes above $100.00 at the Jan2015 options expiration): +$0.00
= ($100.00-$100.00)*200 shares

Total Net Profit (If Alibaba is above $100.00 strike price at Jan2015 options expiration): +$509.55 
= (+$509.55 +$0.00 +$0.00)

Absolute Return (If Alibaba is above $100.00 at Jan2015 options expiration and Put options thus expire worthless): +2.5%
= +$509.55/$20,000.00
Annualized Return (If Alibaba is above $100.00 at expiration): +28.2%
= (+$509.55/$20,000.00)*(365/33 days)

The downside 'breakeven price' at expiration is at $97.40 ($100.00 - $2.60), which is 7.7% below the current market price of $105.51.
The 'crossover price' at expiration is $108.11 ($105.51 + $2.60).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until January 16th (the Jan2015 options expiration date) rather than holding this short Puts option position.