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Friday, May 12, 2017

Established Positions in PulteGroup Inc. and Antero Resources Corp.

Two positions have been established in PulteGroup Inc.(ticker symbol PHM) and Antero Resources Corp.(ticker AR).  PulteGroup Inc. is a covered calls position with a Jun2017 expiration at the $22.00 strike price that includes the expected upcoming quarterly ex-dividend of $.09 on June 6th.  For Antero Resources Corp., ten June 2017 100% cash-secured Put options were sold at the $20 strike price.  The short Puts were chosen instead of covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, some potential returns are:
1. PulteGroup Inc.: +1.5% absolute return in 36 days (equivalent to a +14.8% annualized return-on-investment) if the price of Pulte remains above the strike price at expiration.
2. Antero Resources Corp.: +2.2% absolute return in 36 days (equivalent to a +22.2% annualized return-on-investment)

The details for each position are provided below.

1. PulteGroup Inc. (PHM) -- New Covered Calls Position

The transactions were as follows:
05/12/2017 Bought 1,000 Pulte shares @ $22.80
05/12/2017 Sold 10 Pulte Jun2017 $22.00 Call options @ $1.06
Note: a simultaneous buy/write transaction was executed.
06/06/2017 Upcoming ex-dividend of $.09 per share

Two possible overall performance results (including commissions) for this Pulte covered calls position are as follows:
Stock Purchase Cost: $22,804.95
= ($22.80*1,000+$4.95 commission)

Net Profit:
(a) Options Income: +$1,048.55
= ($1.06*1,000 shares) - $11.45 commissions
(b) Dividend Income (if stock assigned on day prior to June 6th ex-div date): +$0.00; or
(b) Dividend Income (if dividend captured on 6/6/2017): +$90.00
= ($.09 dividend per share x 1,000 shares)
(c) Capital Appreciation (if stock assigned on day prior to June 6th ex-div date): -$804.95
=+($22.00-$22.80)*1,000 - $4.95 commissions; or
(c) Capital Appreciation (If stock assigned at Jun2017 options expiration): -$804.95
=+($22.00-$22.80)*1,000 - $4.95 commissions

1. Total Net Profit (If Pulte stock assigned on June 5th): +$243.60
= (+$1,048.55 options income +$0.00 dividend income -$804.95 capital appreciation); or
2. Total Net Profit (If Pulte stock assigned at $22.00 at Jun2017 expiration): +$333.60
= (+$1,048.55 +$90.00 +$804.95)

1. Absolute Return (If Pulte stock assigned on June 5th -- day prior to ex-div date): +1.1%
= +$243.60/$22,804.95
Annualized Return: +15.6%
= (+$243.60/$22,804.95)*(365/25 days); OR

2. Absolute Return (If Pulte assigned at $22.00 on June 16th options expiration date): +1.5%
= +$333.60/$22,804.95
Annualized Return: +14.8%
= (+$333.60/$22,804.95)*(365/36 days)

2. Antero Resources Corp. (AR) -- New 100% Cash-Secured Puts Position

Today, the Covered Calls Advisor established a new position in Antero Resources Corp. (ticker symbol AR) by selling ten Jun2017 Put options at the $20.00 strike price. This position is a conservative one since it was established when the price of Antero Resources was $20.86 (4.1% downside protection to the strike price) and 36 days remaining until the options expiration date.

The implied volatility of the Put options was 30.6 when this position was established; so the $.45 price per share received when the Puts were sold is a nice premium to receive for these 4.1% out-of-the-money Put options.    

The transaction was as follows:
05/12/2017  Sold 10 AR Jun2017 $20.00 100% cash-secured Put options @ $.45
Note: the price of Antero was $20.86 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 ten Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $20.00*1,000
Note: the price of AR was $20.86 when these options were sold

Net Profit:
(a) Options Income: +$438.55
= ($.45*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Antero stock is above $20.00 strike price at Jun2017 expiration): +$0.00
= ($20.00-$20.00)*1,000 shares

Total Net Profit (If Antero Resources stock price is above $20.00 strike price at Jun2017 options expiration): +$438.55
= (+$438.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If AR is above $20.00 strike price at Jun2017 options expiration): +2.2%
= +$438.55/$20,000.00
Annualized Return: +22.2%
= (+$438.55/$20,000.00)*(365/36 days)

The downside 'breakeven price' at expiration is at $19.55 ($20.00 - $.45), which is 6.3% below the current market price of $20.86.

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 Antero Resources Corp. short Puts position is 68.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Antero shares over the same time period. Using this probability of profit of 68.5%, the expected value annualized return-on-investment (if held until expiration) is +15.2% (+22.2% * 68.5%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $21.31 ($20.86 + $.45).  This is the price above which it would have been more profitable to simply buy-and-hold AR stock until the June 2017 options expiration date of June 16th rather than selling these Put options.