Monday, September 21, 2015

Established Short 100% Cash-Secured Puts Position in Amgen Inc.

Today, the Covered Calls Advisor established a 100% cash-secured Puts position in Amgen Inc. (ticker AMGN) by selling 2 Oct2015 Put options at the $140.00 strike price. This position indicates that the Covered Calls Advisor is willing to purchase Amgen shares at $140.00 (for future covered calls investments) upon the market close on October 16th if the stock declines to below $140.00 at that time.  This is a conservative investment since AMGN stock was at $147.10 (4.8% above the strike price) when this position was established.

As detailed below, this investment will achieve a +1.8% absolute return in 26 days (which is equivalent to a +24.9% annualized return) if AMGN remains above $140.00 at the October 16th options expiration date. 
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Oct 16th, 2015 options expiration) for this Amgen Inc. short Puts position is 71.4%. This compares with a probability of profit of 50.2% for a buy-and-hold of Amgen stock over the same time period. Using this probability of profit of 71.4%, the Expected Value annualized ROI of this investment (if held until expiration) is +17.7% (+24.9% * 71.4%).

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

1.  Amgen Inc. (AMGN) -- New Position
The transaction was as follows:
09/21/2015 Sold 2 Amgen Inc. Oct2015 $140.00 Puts @ $2.54
Note: The price of AMGN was $147.10 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 two Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $28,000.00
= $140.00*200
Note:  the price of AMGN was $147.10 when the two Put options were sold.

Net Profit:
(a) Options Income: +$497.55
= ($2.54*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Amgen stock is above $140.00 strike price at Oct2015 expiration): +$0.00
= ($140.00-$140.00)*200 shares

Total Net Profit (If Amgen is above $140.00 strike price upon the Oct2015 options expiration): +$497.55
= (+$497.55 +$0.00 +$0.00)

Absolute Return: +1.8%
= +$497.55/$28,000.00
Annualized Return: +24.9%
= (+$497.55/$28,000.00)*(365/26 days)

The downside 'breakeven price' at expiration is at $137.46 ($140.00 - $2.54), which is 9.6% below the current market price. 
The 'crossover price' at expiration is $149.64 ($147.10 + $2.54).  This is the price above which it would have been more profitable to simply buy-and-hold Amgen Inc. shares until October 16th (the Oct2015 options expiration date) rather than selling these Put options.