Yesterday, the Covered Calls Advisor established a new position in Dow Chemical Company (ticker symbol DOW) by selling three Sep2015 Put options at the $43.00 strike price. This position is a conservative one since it was established with 5.0% downside protection to the strike price.
As detailed below, the Dow Chemical investment will yield a +1.9% absolute
return in 37 days (which is equivalent to a +19.1% annualized
return-on-investment) if Dow Chemical closes above the $43.00 strike price on the Sep2015 options expiration date.
This potential return is very good given the substantial 5.0% downside protection (from the current $45.25 stock price to the $43.00 strike price) when the position was established. The implied volatility in the options was relatively high at 32 when this position was established; so the $.87 price per share received when the Puts were sold is very attractive to us option sellers, especially since the level of unknowns between now and the Sep2015 options expiration is relatively low, given that DOW has already announced their 2nd quarter earnings results.
The transaction was as follows:
08/13//2015 Sold 3 DOW Sep2015 $43.00 100% cash-secured Put options @ $.87
Note: The price of DOW was $45.25 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) would be as follows:
100% Cash-Secured Cost Basis: $12,908.95
= $43.00*300 + $8.95
(a) Options Income: +$249.80
= ($.87*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DOW is above $43.00 strike price at Sep2015 expiration): +$0.00
= ($43.00-$43.00)*300 shares
Total Net Profit (If DOW is above $43.00 strike price at Sep2015 options expiration): +$249.80
= (+$249.80 +$0.00 +$0.00)
Absolute Return (If DOW is above $43.00 strike price at Sep2015 options expiration): +1.9%
Annualized Return (If DOW is above $43.00 at expiration): +19.1%
= (+$249.80/$12,908.95)*(365/37 days)
downside 'breakeven price' at expiration is at $42.13 ($43.00 - $.87),
which is 6.9% below the current market price of $45.25.
'crossover price' at expiration is $46.12 ($45.25 + $.87). This is the
price above which it would have been more profitable to simply
buy-and-hold Dow Chemical stock until Sept 18th (the Sep2015 options expiration date)
rather than selling these Put options.