Monday, December 7, 2015

Established New Position in Enterprise Products Partners LP

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
The transaction was as follows:
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
= $21.00*300
Note: the price of EPD was $21.64 when these options were sold

Net Profit:
(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%
= +$199.80/$6,300.00
Annualized Return: +96.5%
= (+$199.80/$6,300.00)*(365/12 days)

The 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 probability of profit of 50.4% for a buy-and-hold of EPD stock over the same time period. 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.  

The '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