Earlier today, a covered calls position in home builder PulteGroup Inc.(ticker PHM) was liquidated when the Jun2017 Call options were assigned early and the stock sold (see detailed result of PHM position here: link). The majority of this cash was used to establish five June 2017 100% cash-secured Put options position in another home builder (D R Horton Inc.) at the $33.00 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 +1.1% absolute return in 11 days (equivalent to a +37.6% annualized return-on-investment) with this investment.
D R Horton screens attractively on the Covered Calls Advisor's preferred quality, value, and growth metrics and currently receives the highest rating (5 stars) from S&P Capital along with a $38 12-month price target. A discounted cash flow estimate (shown in the chart below) using a 6% discount rate and 9% growth rate results in an even more attractive $46.70 fair value estimate.
Note: the $35 'Buy Price' shown provides a 25% margin-of-safety below the DCF Fair Value price.
D R Horton Inc. (DHI) -- New 100% Cash-Secured Puts Position
The implied volatility of the Put options was 18.2 when this position
was established and the price received was $.39 per share.
The transaction was as follows:
06/06/2017 Sold 5 DHI Jun2017 $33.00 100% cash-secured Put options @ $.39
Note: the price of DHI was $33.10 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: $16,500.00
Note: the price of DHI was $33.10 when these options were sold
(a) Options Income: +$186.80
= ($.39*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If D R Horton is above $33.00 strike price at Jun2017 expiration): +$0.00
= ($33.00-$33.00)*500 shares
Total Net Profit (If D R Horton stock price is above $33.00 strike price at Jun2017 options expiration): +$186.80
= (+$186.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return:: +1.1%
Annualized Return: +37.6%
= (+$186.80/$16,500.00)*(365/11 days)
downside 'breakeven price' at expiration is at $32.61 ($33.00 - $.39),
which is 1.5% below the current market price of $33.10.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Jun 16th, 2017 options expiration) for
this DHI short Puts position is 54.3%%. This compares with a
profit of 50.3% for a buy-and-hold of DHI shares over the same
Using this probability of profit of 54.3%, the expected value annualized return-on-investment (if held until expiration) is +20.4% (+37.6% *
54.3%), a satisfactory risk/reward profile for this short-term investment.
'crossover price' at expiration is $33.49 ($33.10 + $.39). This is the
price above which it would have been more profitable to simply
buy-and-hold D R Horton stock until the June 16th, 2017 options expiration date
rather than selling these Put options.