Today, the Covered Calls Advisor established a new position in Enterprise Products Partners LP (ticker symbol EPD) by selling three Dec2015 Put options at the $21.00 strike price. This position is a conservative one since it was established with 3.0% downside protection to the strike price.
As detailed below, the Enterprise Products Partners investment will yield a +3.2% absolute
return in 12 days (which is equivalent to a +96.5% annualized
return-on-investment) if EPD closes above the $21.00 strike price on the Dec 18th options expiration date.
This potential return is very nice given the downside protection (from the $21.64 stock price to the $21.00 strike price) when the position was established. Because of the recent rapid decline in Master Limited Partnerships (MLPs), including another 5% today when this position was established, the implied volatility in the options had ballooned to 55; so the $.70 per share price when the Puts were sold is a very attractive premium received.
1. Enterprise Products Partners LP (EPD) -- New 100% Cash-Secured Puts Position
12/07/2015 Sold 3 EPD Dec2015 $21.00 100% cash-secured Put options @ $.70
Note: the price of EPD was $21.64 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 Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $6,300.00
Note: the price of EPD was $21.64 when these options were sold
(a) Options Income: +$199.80
= ($.70*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EPD is above $21.00 strike price at Dec2015 expiration): +$0.00
= ($21.00-$21.00)*300 shares
Total Net Profit (If EPD is above $21.00 strike price at Dec2015 options expiration): +$199.80
= (+$199.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If EPD is above $21.00 strike price at Dec2015 options expiration): +3.2%
Annualized Return: +96.5%
= (+$199.80/$6,300.00)*(365/12 days)
downside 'breakeven price' at expiration is at $20.30 ($21.00 - $.70),
which is 6.2% below the current market price of $21.64.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Dec 18th, 2015 options expiration) for
this EPD short Puts position is 65%. This compares with a
profit of 50.4% for a buy-and-hold of EPD stock over the same
Using this probability of profit of 65%, the expected value annualized return-on-investment (if held until expiration) is +62.7% (+96.5% *
65%), an extraordinarily high value for this investment.
'crossover price' at expiration is $22.34 ($21.64 + $.70). This is the
price above which it would have been more profitable to simply
buy-and-hold Enterprise Products Partners until the Dec2015 options expiration date