As detailed below, the Dick's Sporting Goods Inc. investment will yield a +3.3% absolute return in 32 days (which is equivalent to a +37.5% annualized return-on-investment) if Dick's stock closes above the $48.00 strike price on the Mar 17th options expiration date.
The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the five Put options sold.
The implied volatility of the Put options was 45 when this position was established; so the $1.60 price per share received when the Puts were sold is a nice premium to receive for these 5.7% out-of-the-money Put options.
The transaction was as follows:
02/14/2017 Sold 5 DKS 100% cash-secured $48.00 Put options with Mar2017 expirations @ $1.60
Note: the price of Dick's stock was $50.91 today when this transaction was executed.
A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $24,006.95
= $48.00*500 shares + $6.95 commission
(a) Options Income: +$789.55
= ($1.60 * 500 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DKS closes above $48.00 strike price at Mar2017 expiration): +$0.00
= ($48.00 -$48.00)*500 shares
Total Net Profit: +$789.55
= (+$789.55 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return: +3.3%
Annualized Return: +37.5%
= (+$789.55/$24,006.95)*(365/32 days)
The downside 'breakeven price' at expiration is at $46.40 ($48.00 - $1.60), which is 8.9% below the current market price of $50.91.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the March 17th, 2017 options expiration) for this Dick's Sporting Goods short Puts position is 70%. This compares with a probability of profit of 50.3% for a buy-and-hold of Dick's stock over the same time period. Using this probability of profit of 70%, the expected value annualized return-on-investment (if held until expiration) is +26.3% (+37.5% maximum potential annualized return on investment * 70%), an attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $52.51 ($50.91 + $1.60). This is the price above which it would have been more profitable to simply buy-and-hold Dick's Sporting Goods Inc. stock until the Feb2017 options expiration date rather than selling these Put options.