As detailed below, there is potential for a +1.7% absolute return in 19 days (equivalent to a +33.6% annualized return-on-investment).
Transdigm Group Inc. (TDG) -- New 100% Cash-Secured Puts Position
This position was established when the price of Transdigm Group was $218.30 (3.8%
downside protection to the strike price) and 19 days remaining until the
options expiration date.The implied volatility of the Put options was 35.8 when this position was established; so the $3.70 price received per share received when the Puts were sold is a nice premium to receive for these 3.8% out-of-the-money Put options.
The transaction was as follows:
04/03/2017 Sold 2 TDG Apr2017 $201.00 100% cash-secured Put options @ $3.70
Note: the price of TDG was $218.30 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 two Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $42,000.00
= $210.00*200
Note: the price of TDG was $218.30 when these options were sold
Net Profit:
(a) Options Income: +$733.75
= ($3.70*200 shares) - $6.25 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TDG is above $210.00 strike price at Apr2017 expiration): +$0.00
= ($210.00-$210.00)*200 shares
Total Net Profit (If Transdigm Group Inc. stock price is above $210.00 strike price at Apr2017 options expiration): +$733.75
= (+$733.75 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If TDG is above $210.00 strike price at Apr2017 options expiration): +1.7%
= +$733.75/$42,000.00
Annualized Return: +33.6%
= (+$733.75/$42,000.00)*(365/19 days)
The downside 'breakeven price' at expiration is at $206.30 ($210.00 - $3.70), which is 5.5% below the current market price of $218.30.
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 Transdigm short Puts position is 69.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of TDG shares over the same time period. Using this probability of profit of 69.5%, the expected value annualized return-on-investment (if held until expiration) is +23.4% (+33.6% * 69.5%), an attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $222.00 ($218.30 + $3.70). This is the price above which it would have been more profitable to simply buy-and-hold TDG stock until the April 21, 2017 options expiration date rather than selling these Put options.
