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Thursday, January 12, 2017

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 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 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: Inc. (AMZN)
The transaction is as follows:
01/12/2017 Sold 1 Feb2017 $770.00 Put @ $17.50
Note: The price of 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 transaction would be as follows:
100% Cash-Secured Cost Basis: $77,000.00 = $770.00 * 100 shares

Net Profit:
(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%
= +$1,741.30/$75,000.00
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 short Put position is 68.5%. 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 68.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +15.3% (+22.3% * 68.5%).
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 stock until Feb 17th (the Feb2017 options expiration date) rather than selling this short Put option.