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Tuesday, January 10, 2017

Sold 100% Cash-Secured Put Options in AerCap Holdings NV

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in AerCap Holdings NV (Ticker Symbol AER) with a Jan2017 expiration and at the $42.50 strike price.  As detailed below, this investment will provide a +1.0% absolute return in 11 days (which is equivalent to a +33.9% annualized return) if AerCap stock closes at or above $42.50 at options expiration on Jan 20th.  This potential result exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  

Given the Covered Calls Advisor's current 'Slightly Bearish' overall market outlook, ten out-of-the-money Put options were sold with the strike price of $42.50 below the current stock price of $43.15 when these options were sold.

Details of this transaction along with a potential return-on-investment result are: 

AerCap Holdings NV (AER)
The transaction is as follows:
01/10/2017 Sold 10 Jan2017 $42.50 Puts @ $.45
Note: The price of AerCap stock was $43.15 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 options sold.

A possible overall performance result (including commissions) for this AerCap transaction would be as follows:
100% Cash-Secured Cost Basis: $42,500.00 = $42.50 * 1,000 shares

Net Profit:
(a) Options Income: +$434.55
= ($.45*1,000 shares) - $15.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AER closes above $42.50 at Jan2017 expiration): +$0.00
= ($42.50-$42.50)*1,000 shares

Total Net Profit (If AER is above $42.50 strike price at Jan2017 options expiration):+$434.55 
= (+$434.55 +$0.00 +$0.00)

Absolute Return (If AER is above $42.50 at Jan2017 options expiration and Put options thus expire worthless): +1.0%
= +$434.55/$42,500.00
Annualized Return: +33.9%
= (+$434.55/$42,500.00)*(365/11 days)

The downside 'breakeven price' at expiration is at $42.05 ($42.50 - $.45), which is 2.5% below the current market price of $43.15.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 20th, 2017 options expiration) for this AerCap short Pus position is 65%. This compares with a probability of profit of 50.4% for a buy-and-hold of stock over the same time period. Using this probability of profit of 65%, the Expected Value annualized ROI of this investment (if held until expiration) is +22.0% (+33.9% * 65%).
The 'crossover price' at expiration is $43.60 ($43.15 + $.45).  This is the price above which it would have been more profitable to simply buy-and-hold AerCap stock until Jan 20th (the Jan2017 options expiration date) rather than selling these short Put options.