Today, the Covered Calls Advisor established a new position in Time Warner Inc. (ticker symbol TWX) by selling three Nov2015 Put options at the $67.50 strike price. This position is a conservative one since it was established with 1.8% downside protection to the strike price.
As detailed below, the Time Warner Inc. investment will yield a +1.6% absolute
return in 12 days (which is equivalent to a +47.9% annualized
return-on-investment) if TWX closes above the $67.50 strike price on the Nov2015 options expiration date.
This potential return is excellent given the 1.8% downside protection (from the $68.74 stock price to the $67.50 strike price) when the position was established. The implied volatility in the options was relatively high at about 32 when this position was established; so the $1.10 price per share received when the Puts were sold is very attractive to us option sellers.
The transaction was as follows:
11/09/2015 Sold 3 TWX 100% cash-secured $67.50 Put options @ $1.10
Note: The price of TWX was $68.74 today when this transaction was executed.
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) would be as follows:
100% Cash-Secured Cost Basis: $20,250.00
(a) Options Income: +$318.80
= ($1.10*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TWX is above $67.50 strike price at Nov2015 expiration): +$0.00
= ($67.50-$67.50)*300 shares
Total Net Profit (If TWX is above $67.50 strike price at Nov2015 options expiration): +$318.80
= (+$318.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If TWX is above $67.50 strike price at Nov2015 options expiration): +1.6%
Annualized Return: +47.9%
= (+$318.80/$20,250.00)*(365/12 days)
downside 'breakeven price' at expiration is at $66.40 ($67.50 - $1.10),
which is 3.4% below the current market price of $68.74.
'crossover price' at expiration is $69.84 ($68.74 + $1.10). This is the
price above which it would have been more profitable to simply
buy-and-hold TWX until Nov 20th (the Nov2015 options expiration date)
rather than selling these Put options.