Wednesday, January 18, 2017

Established Positions in Citigroup Inc. and Hawaiian Holdings Inc.

Two positions have been established in Citigroup Inc.(ticker symbol C) and Hawaiian Holdings Inc.(ticker HA).  Citigroup Inc. is a covered calls position with a Feb2017 expiration at the $60.00 strike price that includes the expected upcoming quarterly ex-dividend of $.16 around Jan 30th.  For Hawaiian Holdings Inc., five February 2017 100% cash-secured Put options were sold at the $50 strike price.  The short Puts were chosen instead of covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, some potential returns are:
1. Citigroup Inc.: +1.4% absolute return in 31 days (equivalent to a +16.9% annualized return-on-investment) if the price of Citigroup is unchanged at expiration.  If the stock increases above the strike price at expiration, there would be a +5.8% absolute return and a +68.5% annualized roi.
2. Hawaiian Holdings Inc.: +1.4% absolute return in 32 days (equivalent to a +15.4% annualized return-on-investment)

The details for each position are provided below.

1. Citigroup Inc. (C) -- New Covered Calls Position

The transactions were as follows:
01/18/2017 Bought 500 Citi shares @ $57.48
01/18/2017 Sold 5 Citi Feb2017 $60.00 Call options @ $.63
Note: a simultaneous buy/write transaction was executed.
01/30/2017 Estimated upcoming ex-dividend of $.16 per share

Two possible overall performance results (including commissions) for this Citi covered calls position are as follows:
Stock Purchase Cost: $28,747.95
= ($57.48*500+$7.95 commission)

Net Profit:
(a) Options Income: +$340.80
= ($.63*500 shares) - $11.70 commissions
(b) Dividend Income: +$80.00
= ($.16 dividend per share x 500 shares)
(c) Capital Appreciation (If price of Citi stock is unchanged at $57.48 upon Feb2017 options expiration date): -$7.95
=+($57.48-$57.48)*500 - $7.95 commissions; or
(c) Capital Appreciation (If price of Citi stock rises to above $60.00 strike price at Feb2017 options expiration date): +$1,252.05
=+($60.00-$57.48)*500 - $7.95 commissions

Total Net Profit (If Citi stock price unchanged at Feb2017 expiration): +$412.85
= (+$340.80 options income +$80.00 dividend income -$7.95 capital appreciation); or
Total Net Profit (If Citi stock assigned at $60.00 at Feb2017 expiration): +$1,672.85
= (+$340.80 +$80.00 +$1,252.05)

1. Absolute Return (If Citi stock price unchanged at expiration): +1.4%
= +$412.85/$28,747.95
Annualized Return: +16.9%
= (+$412.85/$28,747.95)*(365/31 days); OR

2. Absolute Return (If Citi assigned at $60.00 at Feb2017 expiration): +5.8%
= +$1,672.85/$28,747.95
Annualized Return: +68.5%
= (+$1,672.85/$28,747.95)*(365/31 days)

2. Hawaiian Holdings Inc. (HA) -- New 100% Cash-Secured Puts Position

Yesterday, the Covered Calls Advisor established a new position in Hawaiian Holdings Inc. (ticker symbol HA) by selling five Feb2017 Put options at the $50.00 strike price. This position is a very conservative one since it was established when the price of Hawaiian Air was $56.50 (11.5% downside protection to the strike price) and 32 days remaining until the options expiration date.

The implied volatility of the Put options was 41.6 when this position was established; so the $.70 price received per share received when the Puts were sold is a nice premium to receive for these 11.5% out-of-the-money Put options.    

The transaction was as follows:01/17/2017  Sold 5 HA Feb2017 $50.00 100% cash-secured Put options @ $.70
Note: the price of HAL was $56.50 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: $24,992.05
= $50.00*500 - $7.95 commission
Note: the price of HA was $56.50 when these options were sold

Net Profit:
(a) Options Income: +$338.30
= ($.70*500 shares) - $11.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HA is above $50.00 strike price at Feb2017 expiration): +$0.00
= ($55.00-$55.00)*500 shares

Total Net Profit (If Hawaiian Holdings stock price is above $50.00 strike price at Feb2017 options expiration): +$338.30
= (+$338.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HA is above $50.00 strike price at Feb2017 options expiration): +1.4%
= +$338.30/$24,992.05
Annualized Return: +15.4%
= (+$338.30/$24,992.05)*(365/32 days)

The downside 'breakeven price' at expiration is at $449.30 ($50.00 - $.70), which is 12.7% below the current market price of $56.50.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Feb 17th, 2017 options expiration) for this Hawaiian Holdings short Puts position is 84.4%. This compares with a probability of profit of 50.3% for a buy-and-hold of HA shares over the same time period. Using this probability of profit of 84.4%, the expected value annualized return-on-investment (if held until expiration) is +13.0% (+15.4% * 84.4%), an attractive risk/reward profile for this very conservative investment.  

The 'crossover price' at expiration is $57.20 ($56.50 + $.70).  This is the price above which it would have been more profitable to simply buy-and-hold HA stock until the Feb2017 options expiration date rather than selling these Put options.