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Thursday, April 2, 2015

Established Short 100% Cash-Secured Puts Position in General Motors Co.

Today, the Covered Calls Advisor established a 100% cash-secured Puts position in General Motors Co. (Symbol GM) by selling 3 Apr2015 Put options at the $36.00 strike price. This position indicates that the Covered Calls Advisor is willing to purchase GM shares at $36.00 (for future covered calls investments) upon the market close on April 17th if the stock declines to below $36.00 at that time.  This is a somewhat conservative investment since GM stock was at $36.37 (1.0% above the strike price) when this position was established.

As detailed below, this investment will achieve a +1.2% absolute return in 16 days (which is equivalent to a +27.4% annualized return) if the GM stock price remains above $36.00 at the April 17th options expiration date.

This transaction and the associated potential return-on-investment result is detailed below.

1.  GM Co. (GM) -- New Position
The transaction was as follows:
04/02/2015 Sold 3 GM Co. Apr2015 $36.00 Puts @ $.47
Note: The price of GM was $36.37 when this transaction was executed.

Note: The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result 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: $10,800.00
= $36.00*300
Note:  the price of GM was $36.37 when the Put options were sold.

Net Profit:
(a) Options Income: +$129.80
= ($.47*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GM is above $36.00 strike price at Apr2015 expiration): +$0.00
= ($36.00-$36.00)*300 shares

Total Net Profit (If GM is above $36.00 strike price upon the Apr2015 options expiration): +$129.80
= (+$129.80 +$0.00 +$0.00)

Absolute Return (If GM is above $36.00 strike price at Apr2015 options expiration): +1.2%
= +$129.80/$10,800.00
Annualized Return: +27.4%
= (+$129.80/$10,800.00)*(365/16 days)

The downside 'breakeven price' at expiration is at $35.53 ($36.00 - $.47), which is 2.3% below the current market price.
The 'crossover price' at expiration is $36.84 ($36.37 + $.47).  This is the price above which it would have been more profitable to simply buy-and-hold GM stock until April 17th (the Apr2015 options expiration date) rather than holding this short Put option.