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Monday, March 6, 2017

Established Short Put Options Position in Energy Transfer Equity LP

Today, a new position was established in Energy Transfer Equity LP (ticker ETE) with an Apr2017 options expiration at the $18.00 strike price.  These short Puts were chosen since they provide a slightly higher potential return-on-investment result than their comparable Covered Calls.  The Covered Calls Advisor does not use margin, so 100% cash-secured Put options were sold.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative investment was made with the strike price below the stock price when the position was established.  There is not a quarterly earnings report or ex-dividend date prior to the Apr2017 options expiration date. 

As detailed below, the potential return is +2.8% absolute return in 47 days (equivalent to a +21.9% annualized return-on-investment).
Note: the Implied Volatility (IV) of the options at the time they were sold was 31.6, so these options exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment for the conservative risk profile of this position.  

Energy Transfer Equity LP (ETE) -- New 100% Cash-Secured Puts Position
The transactions were as follows:
03/06/2017 Sold 10 ETE Apr2017 $18.00 100% cash-secured Put options @ $.52
Note: the price of ETE was $18.99 when these Puts were sold

A possible overall performance result (including commissions) for this Energy Transfer position is as follows:
Stock Cost Basis: $18,000.00
= $18.00*1,000 shares

Net Profit:
(a) Options Income: +$508.55
= ($.52*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If price of ETE stock is above $18.00 strike price at Apr2017 options expiration date): +$0.00
=+($18.00-$18.00)*1,000 shares

Total Net Profit (If Energy Transfer stock is assigned at $18.00 at Apr2017 expiration): +$508.55
= (+$508.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.8%
= +$508.55/$18,000.00
Annualized Return: +21.9%
= (+$508.55/$18,000.00)*(365/47 days)

The downside 'breakeven price' at expiration is at $17.48 ($18.00 - $.52), which is 8.0% below the current market price of $18.99.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the April 21st, 2017 options expiration) for this ETE short Puts position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of ETE shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +14.8% (+21.9% * 67.8%), a nice risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $19.51 ($18.99 + $.52).  This is the price above which it would have been more profitable to simply buy-and-hold ETE until the Apr2017 options expiration date rather than selling these Put options.