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Wednesday, January 7, 2015

Established New Short 100% Cash-Secured Puts Position in General Electric Company

Yesterday, the Covered Calls Advisor established a new position in the General Electric Company (ticker symbol GE) by selling 4 Jan2015 $24.00 Put options.  As detailed below, this investment will yield a +1.3% absolute return in 12 days (which is equivalent to a +39.3% annualized return-on-investment) if GE closes above the $24.00 strike price on the Jan 16th options expiration date.  The transaction and a potential return-on-investment result is:

1.  General Electric Company (GE) -- New Position
The transaction was as follows:
01/06/2015 Sold 4 General Electric Co Jan2015 $24.00 Puts @ $.34
Note: The price of GE was $24.00 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 four Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $9,600.00
= $24.00*400
Note:  the price of GE was $24.00 when these Put options were sold.

Net Profit:
(a) Options Income: +$124.05
= ($.34*400 shares) - $11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GE is above $24.00 strike price at Jan2015 expiration): +$0.00
= ($24.00-$24.00)*400 shares

Total Net Profit (If GE is above $24.00 strike price at Jan2015 options expiration): +$124.05
= (+$124.05 +$0.00 +$0.00)

Absolute Return (If GE is above $24.00 strike price at Jan2015 options expiration): +1.3%
= +$124.05/$9,600.00
Annualized Return (If GE is above $24.00 at expiration): +39.3%
= (+$124.05/$9,600.00)*(365/12 days)

The downside 'breakeven price' at expiration is at $23.66 ($24.00 - $.34), which is 1.3% below the current market price of $24.00.
The 'crossover price' at expiration is $24.34 ($24.00 + $.34).  This is the price above which it would have been more profitable to simply buy-and-hold GE until Jan 16th (the Jan2015 options expiration date) rather than purchasing these short Put options.