Today, the Covered Calls Advisor established a 100% Cash-Secured Put position in Amazon.com Inc.(Ticker Symbol AMZN) with a Feb2017 expiration and at the $770.00 strike price. As detailed below, this investment will provide a +2.3% absolute return in 37 days (which is equivalent to a +22.3% annualized return) if Amazon.com stock closes at or above $770.00 at options expiration on Feb 17th. This potential result exceeds the Covered Calls Advisor's desired threshold of >20% potential annualized return-on-investment.
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 $770.00 (which is 4.2% below the stock price of
$813.49) at the time this Put option was sold.
Details of this transaction along with a potential return-on-investment result are:
Amazon.com Inc. (AMZN)
The transaction is as follows:
01/12/2017 Sold 1 Feb2017 $770.00 Put @ $17.50
Note: The price of Amazon.com stock was $803.49 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 Amazon.com transaction would be as follows:
100% Cash-Secured Cost Basis: $77,000.00 = $770.00 * 100 shares
(a) Options Income: +$1,741.30
= ($17.50*100 shares) - $8.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AMZN closes above $770.00 at Feb2017 expiration): +$0.00
= ($770.00-$770.00)*100 shares
Total Net Profit (If AMZN is above $770.00 strike price at Feb2017 options expiration):+$1,741.30
= (+$1,741.30 option income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If AMZN is above $770.00 at Feb2017 options expiration and Put option thus expires worthless): +2.3%
Annualized Return: +22.3%
= (+$1,741.30/$75,000.00)*(365/37 days)
The downside 'breakeven price' at expiration is at $752.50 ($770.00 - $17.50), which is 6.3% below the current market price of $803.49.
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 Amazon.com short Put position is 68.5%. This compares with a
profit of 50.3% for a buy-and-hold of Amazon.com stock over the same
Using this probability of profit of 68.5%, the Expected Value annualized
ROI of this investment (if held until expiration) is +15.3% (+22.3% *
The 'crossover price' at expiration is $820.99 ($803.49 + $17.50). This is the price above which it would have been more profitable to simply buy-and-hold Amazon.com stock until Feb 17th (the Feb2017 options expiration date) rather than selling this short Put option.