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Thursday, November 17, 2016

Established a 100% Cash-Secured Puts Position in Agnico Eagle Mines Ltd.

On Wednesday (November 16th), the Covered Calls Advisor established a 100% Cash-Secured Puts position in Agnico Eagle Mines Ltd. (Ticker Symbol AEM) with a Dec2016 expiration and at the $43.00 strike price.  As detailed below, this investment will provide a +4.5% absolute return in 31 days (which is equivalent to a +52.8% annualized return) if Agnico Eagle stock closes at or above $43.00 at options expiration on Dec 16th.  Given the Covered Calls Advisor's current 'Slightly Bearish' overall market outlook, slightly out-of-the-money Put options were sold with the strike price of $43.00 below the stock purchase price of $43.93.

This Dec2016 position is the second position established in AEM.  About 3 weeks ago, a Nov2016 postion was established at the $46.00 strike price.  Both current positions are now listed in the Covered Calls Advisor Portfolio Holdings in the right sidebar of this page.

This transaction was executed with the price of gold at $1,227.  This advisor agrees with Goldman Sachs, who has called gold at current levels a 'strategic buying opportunity', despite the very strong likelihood that the Fed will raise by 1/4% at their December meeting.  In sympathy with the recent decline of the gold price, AEM's stock has plummeted by 13% in the last week.  Understandably, the implied volatility of the Put options selected has soared to 46.8, a level that provides us option sellers a very attractive profit potential if the downward gold price trend reverses (or even just stabilizes).   

Details of this transaction along with a potential return-on-investment result are: 

Agnico Eagle Mines Ltd. (AEM)
The transaction is as follows:
11/16/2016 Sold 5 Dec2016 $43.00 Puts @ $1.95
Note: The price of Agnico Eagle was $43.93 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 five Put options sold.

A possible overall performance result (including commissions) for this Agnico Eagle Mines transaction would be as follows:
100% Cash-Secured Cost Basis: $21,500.00 = $43.00*500

Net Profit:
(a) Options Income: +$963.30
= ($1.95*500 shares) - $11.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AEM close above $43.00 at Dec2016 expiration): +$0.00
= ($43.00-$43.00)*500 shares

Total Net Profit (If AEM is above $43.00 strike price at Dec2016 options expiration):+$963.30 
= (+$963.30 +$0.00 +$0.00)

Absolute Return (If AEM is above $43.00 at Dec2016 options expiration and Put options thus expire worthless): +4.5%
= +$963.30/$21,500.00
Annualized Return (If AEM is above $43.00 at expiration): +52.8%
= (+$963.30/$21,500.00)*(365/31 days)

The downside 'breakeven price' at expiration is at $41.05 ($43.00 - $1.95), which is 6.6% below the current market price of $43.93.

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 16th, 2016 options expiration) for this Agnico Eagle short Puts position is 62%. This compares with a probability of profit of 50.3% for a buy-and-hold of Agnico Eagle stock over the same time period. Using this probability of profit of 68%, the Expected Value annualized ROI of this investment (if held until expiration) is +32.7% (+52.8% * 62%).
The 'crossover price' at expiration is $45.88 ($43.93 + $1.95).  This is the price above which it would have been more profitable to simply buy-and-hold Agnico Eagle Mines Ltd. stock until Dec 16th (the Dec2016 options expiration date) rather than holding these short Put options.