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Thursday, February 16, 2017

Established a 100% Cash-Secured Puts Position in Noble Energy, Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in Noble Energy, Inc.(Ticker Symbol NBL) with a Mar2017 expiration.  As detailed below, this investment will provide a +2.9% absolute return in 30 days (which is equivalent to a +35.2% annualized return) if Noble Energy stock closes at or above $37.50 at options expiration on Mar 17th.  Ten slightly in-the-money Put options were sold with the strike price of $37.50 near the stock price of $37.45 when these options were sold.
Note: This potential result exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  

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

Noble Energy, Inc. (NBL)
The transaction is as follows:
02/16/2017 Sold 10 Mar2017 $37.50 Puts @ $1.10
Note: The price of Noble Energy was $37.45 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 ten Put options sold.

A possible overall performance result (including commissions) for this Noble Energy transaction would be as follows:
100% Cash-Secured Cost Basis: $37,506.95 = $37.50*1,000 + $6.95 commission

Net Profit:
(a) Options Income: +$1,086.05
= ($1.10*1,000 shares) - $13.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NBL closes above $37.50 at Mar2017 expiration): +$0.00
= ($37.50-$37.50)*1,000 shares

Total Net Profit (If NBL is above $37.50 strike price at Mar2017 options expiration):+$1,086.05 
= (+$1,086.05 +$0.00 +$0.00)

Absolute Return: +2.9%
= +$1,086.05/$37,506.95
Annualized Return: +35.2%
= (+$1,086.05/$37,506.95)*(365/30 days)

The downside 'breakeven price' at expiration is at $36.40 ($37.50 - $1.10), which is 2.8% below the current market price of $37.45.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 17th, 2017 options expiration) for this Noble Energy short Puts position is 50.7%. This compares with a probability of profit of 50.3% for a buy-and-hold of Noble Energy stock over the same time period. Using this probability of profit of 50.7%, the Expected Value annualized ROI of this investment (if held until expiration) is +17.8% (+35.2% * 50.7%).
The 'crossover price' at expiration is $38.55 ($37.45 + $1.10).  This is the price above which it would have been more profitable to simply buy-and-hold Noble Energy stock until Mar 17th (the Mar2017 options expiration date) rather than holding these short Put options.