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Tuesday, November 29, 2016

Sold a 100% Cash-Secured Put Option in Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Put position in Inc.(Ticker Symbol AMZN) with a Dec2016 expiration and at the $750.00 strike price.  As detailed below, this investment will provide a +1.1% absolute return in 18 days (which is equivalent to a +23.0% annualized return) if stock closes at or above $750.00 at options expiration on Dec 16th.  Given the Covered Calls Advisor's current 'Slightly Bearish' overall market outlook, one out-of-the-money Put option was sold with the strike price of $750.00 below the stock price at $769.70 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: Inc. (AMZN)
The transaction is as follows:
11/29/2016 Sold 1 Dec2016 $750.00 Put @ $8.60
Note: The price of stock was $769.70 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 Put option sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $75,000.00 = $750.00 * 100 shares

Net Profit:
(a) Options Income: +$851.30
= ($8.60*100 shares) - $8.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AMZN closes above $750.00 at Dec2016 expiration): +$0.00
= ($750.00-$750.00)*100 shares

Total Net Profit (If AMZN is above $750.00 strike price at Dec2016 options expiration):+$851.30 
= (+$851.30 +$0.00 +$0.00)

Absolute Return (If AMZN is above $750.00 at Dec2016 options expiration and Put option thus expire worthless): +1.1%
= +$851.30/$75,000.00
Annualized Return (If AMZN is above $750.00 at expiration): +23.0%
= (+$851.30/$75,000.00)*(365/18 days)

The downside 'breakeven price' at expiration is at $741.40 ($750.00 - $8.60), which is 3.7% below the current market price of $769.70.

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 short Pus position is 67.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of stock over the same time period. Using this probability of profit of 67.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +15.5% (+23.0% * 67.5%).
The 'crossover price' at expiration is $778.30 ($769.70 + $8.60).  This is the price above which it would have been more profitable to simply buy-and-hold stock until Dec 16th (the Dec2016 options expiration date) rather than selling this short Put option.