Today, a new position was established in Carmax Inc.(ticker KMX) by selling five April 2017 100% cash-secured Put options at the $55.00 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 +0.8% absolute
return in 11 days (equivalent to a +26.2% annualized
Carmax Inc. (KMX) -- New 100% Cash-Secured Puts Position
The implied volatility of the Put options was 29.0 when this position
was established; so the $.45 price received per share received when the Puts
were sold is a nice premium to receive for these 3.2% out-of-the-money Put
The transaction was as follows:
04/11/2017 Sold 5 KMX Apr2017 $55.00 100% cash-secured Put options @ $.45
Note: the price of KMX was $56.80 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: $27,500.00
Note: the price of KMX was $56.80 when these options were sold
(a) Options Income: +$216.80
= ($.45*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If KMX is above $55.00 strike price at Apr2017 expiration): +$0.00
= ($55.00-$55.00)*500 shares
Total Net Profit (If Carmax Inc. stock price is above $55.00 strike price at Apr2017 options expiration): +$216.80
= (+$216.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If KMX is above $55.00 strike price at Apr2017 options expiration): +0.8%
Annualized Return: +26.2%
= (+$216.80/$27,500.00)*(365/11 days)
downside 'breakeven price' at expiration is at $54.55 ($55.00 - $.45),
which is 4.0% below the current market price of $56.80.
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 Carmax Inc. short Puts position is 73%. This compares with a
profit of 50.2% for a buy-and-hold of KMX shares over the same
Using this probability of profit of 73%, the expected value annualized return-on-investment (if held until expiration) is +19.1% (+26.2% *
73%), an attractive risk/reward profile for this relatively conservative investment.
'crossover price' at expiration is $57.25 ($56.80 + $.45). This is the
price above which it would have been more profitable to simply
buy-and-hold Carmax stock until the April 21, 2017 options expiration date
rather than selling these Put options.