Thursday, February 16, 2017

Established New Position in Hawaiian Holdings Inc.

Today, a new position was established in Hawaiian Holdings Inc.(ticker HA) by selling ten March 2017 100% cash-secured Put options at the $50 strike price.  The short Puts were chosen instead of the comparable covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, there is potential for a +2.9% absolute return in 30 days (equivalent to a +34.8% annualized return-on-investment).

Hawaiian Holdings Inc. (HA) -- New 100% Cash-Secured Puts Position
This position was established when the price of Hawaiian Holdings was $50.65 (1.3% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 29.3 when this position was established; so the $1.45 price received per share received when the Puts were sold is a nice premium to receive for these 1.3% out-of-the-money Put options.    

The transaction was as follows:
02/16/2017  Sold 5 HA Mar2017 $50.00 100% cash-secured Put options @ $1.45
Note: the price of HA was $50.65 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the five Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $24,993.05
= $50.00*500 - $6.95 commission
Note: the price of HA was $50.65 when these options were sold

Net Profit:
(a) Options Income: +$714.55
= ($1.45*500 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HA is above $50.00 strike price at Mar2017 expiration): +$0.00
= ($50.00-$50.00)*500 shares

Total Net Profit (If Hawaiian Holdings stock price is above $50.00 strike price at Mar2017 options expiration): +$714.55
= (+$714.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HA is above $50.00 strike price at Mar2017 options expiration): +2.9%
= +$714.55/$24,993.05
Annualized Return: +34.8%
= (+$714.55/$24,993.05)*(365/30 days)

The downside 'breakeven price' at expiration is at $48.55 ($50.00 - $1.45), which is 4.1% below the current market price of $50.65.

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 Hawaiian Holdings short Puts position is 58.2%. This compares with a probability of profit of 50.3% for a buy-and-hold of HA shares over the same time period. Using this probability of profit of 58.2%, the expected value annualized return-on-investment (if held until expiration) is +20.3% (+34.8% * 58.2%), an attractive risk/reward profile for this investment.  

The 'crossover price' at expiration is $52.10 ($50.65 + $1.45).  This is the price above which it would have been more profitable to simply buy-and-hold HA stock until the Mar2017 options expiration date rather than selling these Put options.