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Friday, November 18, 2016

Established a 100% Cash-Secured Puts Position in Noble Energy, Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in Noble Energy, Inc.(Ticker Symbol NBL) with a Dec2016 expiration and at the $32.50 strike price.  As detailed below, this investment will provide a +1.8% absolute return in 29 days (which is equivalent to a +23.2% annualized return) if Noble Energy stock closes at or above $32.50 at options expiration on Dec 16th.  Given the Covered Calls Advisor's current 'Slightly Bearish' overall market outlook, five out-of-the-money Put options were sold with the strike price of $32.50 below the stock price of $34.95 when these options were sold.
Note: This potential result exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  

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

Noble Energy, Inc. (NBL)
The transaction is as follows:
11/18/2016 Sold 5 Dec2016 $32.50 Puts @ $.60
Note: The price of Noble Energy was $34.95 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 Noble Energy transaction would be as follows:
100% Cash-Secured Cost Basis: $16,250.00 = $32.50*500

Net Profit:
(a) Options Income: +$288.30
= ($.60*500 shares) - $11.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NBL closes above $32.50 at Dec2016 expiration): +$0.00
= ($32.50-$32.50)*500 shares

Total Net Profit (If NBL is above $32.50 strike price at Dec2016 options expiration):+$288.30 
= (+$288.30 +$0.00 +$0.00)

Absolute Return (If NBL is above $32.50 at Dec2016 options expiration and Put options thus expire worthless): +1.8%
= +$288.30/$16,250.00
Annualized Return (If NBL is above $32.50 at expiration): +23.2%
= (+$288.30/$16,250.00)*(365/29 days)

The downside 'breakeven price' at expiration is at $31.90 ($32.50 - $.60), which is 8.7% below the current market price of $34.95.

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 Noble Energy short Puts position is 76%. This compares with a probability of profit of 50.2% for a buy-and-hold of Noble Energy stock over the same time period. Using this probability of profit of 76%, the Expected Value annualized ROI of this investment (if held until expiration) is +17.6% (+23.2% * 76%).
The 'crossover price' at expiration is $35.55 ($34.95 + $.60).  This is the price above which it would have been more profitable to simply buy-and-hold Noble Energy stock until Dec 16th (the Dec2016 options expiration date) rather than holding these short Put options.