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Wednesday, December 31, 2014

Established New Short 100% Cash-Secured Puts Position in Williams Companies Inc.

Today, the Covered Calls Advisor established a new position in Williams Companies Inc. (Symbol WMB) by selling 3 Jan2015 $44.00 Put options. The transaction and a potential return-on-investment result is:

1.  Williams Companies Inc. (WMB) -- New Position
The transaction was as follows:
12/31/2014 Sold 3 Williams Companies Inc. Jan2015 $44.00 Puts @ $.90
Note: The price of WMB was $44.96 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 result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $13,200.00
= $44.00*300
Note:  the price of WMB was $44.96 when these Put options were sold.

Net Profit:
(a) Options Income: +$258.80
= ($.90*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If WMB is above $44.00 strike price at Jan2015 expiration): +$0.00
= ($44.00-$44.00)*300 shares

Total Net Profit (If WMB is above $44.00 strike price at Jan2015 options expiration): +$258.80 
= (+$258.80 +$0.00 +$0.00)

Absolute Return (If WMB is above $44.00 strike price at Jan2015 options expiration): +2.0%
= +$258.80/$13,200.00
Annualized Return (If WMB above $44.00 at expiration): +39.8%
= (+$258.80/$13,200.00)*(365/18 days)

The downside 'breakeven price' at expiration is at $43.10 ($44.00 - $.90), which is 4.1% below the current market price of $44.96.
The 'crossover price' at expiration is $45.86 ($44.96 + $.90).  This is the price above which it would have been more profitable to simply buy-and-hold WMB until Jan 16th (the Jan2015 options expiration date) rather than investing in these short Put options.