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Wednesday, May 24, 2017

Established New Position in Voya Financial Inc.

Today, a new position was established in Voya Financial Inc.(ticker VOYA) by selling five Jun 2017 100% cash-secured Put options at the $34.00 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 +1.6% absolute return in 24 days (equivalent to a +23.9% annualized return-on-investment).

Voya Financial Inc. (VOYA) -- New 100% Cash-Secured Puts Position
This position was established when the price of Voya Financial Inc. was $34.75 (2.2% downside protection to the strike price) and 24 days remaining until the options expiration date.

The implied volatility of the Put options was 23.6 when this position was established; so the $.55 price received per share received when the Puts were sold is a nice premium to receive for these out-of-the-money Put options.    

The transaction was as follows:
05/24/2017  Sold 5 VOYA Jun2017 $34.00 100% cash-secured Put options @ $.55
Note: the price of VOYA was $34.75 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: $17,000.00
= $34.00*500

Net Profit:
(a) Options Income: +$266.80
= ($.55*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VOYA is above $34.00 strike price at Jun2017 expiration): +$0.00
= ($34.00-$34.00)*500 shares

Total Net Profit (If Voya Financial Inc. stock price is above $34.00 strike price at Jun2017 options expiration): +$266.80
= (+$266.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If VOYA is above $34.00 strike price at Jun2017 options expiration): +1.6%
= +$266.80/$17,000.00
Annualized Return: +23.9%
= (+$266.80/$17,000.00)*(365/24 days)

The downside 'breakeven price' at expiration is at $33.45 ($34.00 - $.55), which is 3.7% below the current market price of $34.75.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the June 16th, 2017 options expiration) for this Voya Financial Inc. short Puts position is 64.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of VOYA shares over the same time period. Using this probability of profit of 64.5%, the expected value annualized return-on-investment (if held until expiration) is +15.4% (+23.9% * 64.5%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $35.30 ($34.75 + $.55).  This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the June 16th, 2017 options expiration date rather than selling these Put options.