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Tuesday, January 27, 2015

Established New Short 100% Cash-Secured Puts Position in Avis Budget Group Inc.

Today, the Covered Calls Advisor established a new position in the Avis Budget Group Inc. (ticker symbol CAR) by selling 2 Feb2015 $55.00 Put options.  This advisor has been waiting for the stock to decline below $60 before establishing a position.  With the large decline in the overall market today, this opportunity was realized.  A conservative (8% out-of-the-money) short Puts position  was established because of the increased uncertainty surrounding Avis Budget's 4th quarter earnings report, which will be issued a couple of days prior to the Feb2015 expiration date.  Of course, a potential benefit accompanying this uncertainty is the increased implied volatility (and thus enhanced return-on-investment potential) now available.   

As detailed below, this investment will yield a +1.5% absolute return in 26 days (which is equivalent to a +21.1% annualized return-on-investment) if Avis Budget stock closes above the $55.00 strike price on the Feb 20th options expiration date.

1.  Avis Budget Group Inc. (CAR) -- New Position
The transaction was as follows:
01/27/2015 Sold 2 Avis Budget Group Inc. Feb2015 $55.00 Puts @ $.88
Note: The price of CAR was $59.90 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 transaction would be as follows:
100% Cash-Secured Cost Basis: $11,000.00
= $55.00*200
Note:  the price of CAR was $59.90 when these Put options were sold.

Net Profit:
(a) Options Income: +$165.55
= ($.88*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CAR is above $55.00 strike price at Feb2015 expiration): +$0.00
= ($55.00-$55.00)*200 shares

Total Net Profit (If CAR is above $55.00 strike price at Feb2015 options expiration): +$165.55
= (+$165.55 +$0.00 +$0.00)

Absolute Return (If CAR is above $55.00 strike price at Feb2015 options expiration): +1.5%
= +$165.55/$11,000.00
Annualized Return (If CAR is above $55.00 at expiration): +21.1%
= (+$165.55/$11,000.00 )*(365/26 days)

The downside 'breakeven price' at expiration is at $54.12 ($55.00 - $.88), which is 9.6% below the current market price of $59.90.
The 'crossover price' at expiration is $60.78 ($59.90 + $.88).  This is the price above which it would have been more profitable to simply buy-and-hold Avis Budget stock until Feb 20th (the Feb2015 options expiration date) rather than selling these Put options.