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Thursday, March 23, 2017

Established New Position in Hawaiian Holdings Inc.

Today, a new position was established in Hawaiian Holdings Inc.(ticker HA) by selling five April 2017 100% cash-secured Put options at the $45.00 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 +2.3% absolute return in 30 days (equivalent to a +27.9% 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 $46.88 (4.0% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 30.2 when this position was established; so the $1.05 price received per share received when the Puts were sold is a nice premium to receive for these 4.0% out-of-the-money Put options.    

The transaction was as follows:
03/23/2017  Sold 5 HA Apr2017 $45.00 100% cash-secured Put options @ $1.05
Note: the price of HA was $46.88 today 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: $22,500.00
= $45.00*500
Note: the price of HA was $46.88 when these options were sold

Net Profit:
(a) Options Income: +$516.80
= ($1.05*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HA is above $45.00 strike price at Apr2017 expiration): +$0.00
= ($45.00-$45.00)*500 shares

Total Net Profit (If Hawaiian Holdings stock price is above $45.00 strike price at Apr2017 options expiration): +$516.80
= (+$516.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HA is above $45.00 strike price at Apr2017 options expiration): +2.3%
= +$516.80/$22,500.00
Annualized Return: +27.9%
= (+$516.80/$22,500.00)*(365/30 days)

The downside 'breakeven price' at expiration is at $43.95 ($45.00 - $1.05), which is 6.25% below the current market price of $46.88.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Apr 21st, 2017 options expiration) for this Hawaiian Holdings short Puts position is 67.6%. 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 67.6%, the expected value annualized return-on-investment (if held until expiration) is +18.9% (+27.9% * 67.6%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $47.93 ($46.88 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold HA stock until the April 21, 2017 options expiration date rather than selling these Put options.