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Monday, February 2, 2015

Established New Short 100% Cash-Secured Puts Position in Delta Air Lines Inc.

Today, the Covered Calls Advisor established a new position in Delta Air Lines Inc. (ticker symbol DAL) by selling 2 Feb2015 $44.00 Put options.  A conservative (3% out-of-the-money) short Puts position  was established.  The investment thesis is that for at least the next six months, the cost of oil will continue to be substantially below the prior year levels.  This is a tremendous tailwind (pun intended) to the airline companies, where oil is about 30% of their expenses.  So even with stagnant passenger bookings versus last year, quarterly earnings are expanding dramatically and have yet to be fully appreciated in the stock price.  Even with relatively stagnant passenger bookings versus last year, the domestic airlines remain an oligarchy and will continue to benefit greatly from their commitment to maintain pricing (including those obnoxious extra fees we all despise) near current very profitable levels. The implied volatility in the Feb2015 options remains high despite Delta having already reported earnings (so there will be no earnings announcement prior to the Feb2015 options expiration date).

As detailed below, this investment will yield a +2.7% absolute return in 20 days (which is equivalent to a +49.7% annualized return-on-investment) if Delta Air Lines stock closes above the $44.00 strike price on the Feb 20th options expiration date.

1.  Delta Air Lines Inc. (DAL) -- New Position
The transaction was as follows:
02/02/2015 Sold 2 Delta Air Lines Inc. Feb2015 $44.00 Puts @ $1.25
Note: The price of DAL was $45.27 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: $8,800.00
= $44.00*200
Note:  the price of DAL was $45.27 when these Put options were sold.

Net Profit:
(a) Options Income: +$239.55
= ($1.25*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DAL is above $44.00 strike price at Feb2015 expiration): +$0.00
= ($44.00-$44.00)*200 shares

Total Net Profit (If DAL is above $44.00 strike price at Feb2015 options expiration): +$239.55
= (+$239.55 +$0.00 +$0.00)

Absolute Return (If DAL is above $44.00 strike price at Feb2015 options expiration): +2.7%
= +$239.55/$8,800.00
Annualized Return (If DAL is above $44.00 at expiration): +49.7%
= (+$239.55/$8,800.00)*(365/20 days)

The downside 'breakeven price' at expiration is at $42.75 ($44.00 - $1.25), which is 5.6% below the current market price of $45.27.
The 'crossover price' at expiration is $46.52 ($45.27 + $1.25).  This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until Feb 20th (the Feb2015 options expiration date) rather than selling these Put options.