Search This Blog

Friday, June 16, 2017

Established New Position in Pioneer Natural Resources Co.

Today, a new position was established in Pioneer Natural Resources Co.(ticker PXD) by selling one July 21st, 2017 100% cash-secured Put option at the $150.00 strike price.  The short Put option was chosen instead of the comparable covered call since the potential return-on-investment result was slightly higher for the Put option in this instance.

As detailed below, there is potential for a +1.8% absolute return in 36 days (equivalent to a +17.9% annualized return-on-investment).

Pioneer Natural Resources Co. (PXD) -- New 100% Cash-Secured Puts Position
This position was established when the price of Pioneer Natural Resources was $156.93 (4.4% downside protection to the $150.00 strike price) and 36 days remaining until the July 21st options expiration date.

The implied volatility of the Put options was 27.8 when this position was established; so the $2.70 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:
06/16/2017  Sold 1 PXD July 21, 2017 $150.00 100% cash-secured Put option @ $2.70

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 Put option sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $15,000.00
= $150.00*100

Net Profit:
(a) Options Income: +$264.40
= ($2.70*100 shares) - $5.60 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PXD is above $150.00 strike price at Jul2017 expiration): +$0.00
= ($150.00-$150.00)*100 shares

Total Net Profit (If Pioneer Natural Resources Co. stock price is above $150.00 strike price at July 21st options expiration): +$264.40
= (+$264.40 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If PXD is above $150.00 strike price at July 21st, 2017 options expiration): +1.8%
= +$264.40/$15,000.00
Annualized Return: +17.9%
= (+$264.40/$15,000.00)*(365/36 days)

The downside 'breakeven price' at expiration is at $147.30 ($150.00 - $2.70), which is 6.1% below the current market price of $156.91.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the July 21st, 2017 options expiration) for this Pioneer Resources short Put position is 71.0%. This compares with a probability of profit of 50.3% for a buy-and-hold of PXD shares over the same time period. Using this probability of profit of 71.0%, the expected value annualized return-on-investment (if held until expiration) is +12.7% (+17.9% * 71.0%), a satisfactory risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $159.61 ($156.91 + $2.70).  This is the price above which it would have been more profitable to simply buy-and-hold PXD stock until the July 21st, 2017 options expiration date rather than selling these Put options.