This position indicates that the Covered Calls Advisor would be very willing to purchase Virgin America shares at $30.00 (for future covered calls investments) upon the close of business on the April 17th options expiration date if the stock continues to decline to below the $30.00 strike price. If the stock remains above $30.00 by the market close on April 17th, then the $258.80 profit detailed below (a +2.9% absolute return-on-investment result in 32 days) will have been achieved.
A conservative (6.3% out-of-the-money) short Puts position was established. The investment thesis is that airlines earnings will benefit greatly from the huge decline in oil prices compared with the prior year. Gasoline is a major operational expense for the industry, so Virgin America's earnings could achieve at least $4.00 per share this year which would give it a P/E multiple below 10 (at the $30 strike price). A benefit compared with most other domestic airlines is the relatively low debt levels of VA. With the stock price down today about 7% primarily as a result of a Credit Suisse downgrade of the stock to underperform, this advisor sold these Put options' elevated volatility (Implied Volatility of 48) and will therefore profit nicely if the stock price remains above the $30.00 strike price.
This transaction and a potential return-on-investment result is:
1. Virgin America Inc. (VA) -- New Position
The transaction was as follows:
03/18/2015 Sold 3 Virgin America Inc. Apr2015 $30.00 Puts @ $.90
Note: The price of VA was $32.03 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: $9,000.00
Note: the price of VA was $32.03 when these Put options were sold.
(a) Options Income: +$258.80
= ($.90*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VA is above $30.00 strike price at Apr 17th, 2015 expiration): +$0.00
= ($30.00-$30.00)*300 shares
Total Net Profit (If VA is above $30.00 strike price upon Apr2015 options expiration): +$258.80
= (+$258.80 +$0.00 +$0.00)
Absolute Return (If VA is above $30.00 strike price at Apr2015 options expiration): +2.9%
= (+$258.80/$9,000.00)*(365/32 days)
The downside 'breakeven price' at expiration is at $29.10 ($30.00 - $.90), which is 9.1% below the current market price of $32.03.
The 'crossover price' at expiration is $32.93 ($32.03 + $.90). This is the price above which it would have been more profitable to simply buy-and-hold Virgin America stock until April 17th (the Apr2015 options expiration date) rather than selling these Put options.