Search This Blog

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.