Tuesday, June 20, 2017

Established New Position in Range Resources Corp.

During the first half hour of  trading this morning, a good-til-cancelled order was placed to sell ten July 21st, 2017 Range Resources Corp. (ticker RRC) Put options at the $20.00 strike price for $.45 per share.  At 11:00am, the order was executed when the stock was at $21.44.

As detailed below, there is potential for a +2.2% absolute return in 32 days (equivalent to a +25.0% annualized return-on-investment).

Range Resources Corp. (RRC) -- New 100% Cash-Secured Puts Position
This position was established when the price of Range Resources Corp. was $21.44 (6.7% downside protection to the strike price) and 32 days remaining until the July 21st options expiration date.

With the recent decline in the price of oil and gas being accompanied by a swift decline in energy-related stocks, the implied volatility of options in Range Resources have increased substantially from an average of 33.0 during the last quarter to 41.2 this morning when this position was established; so the $.45 price per share received when the Puts were sold is an attractive premium to receive for these out-of-the-money Put options.    

The transaction was as follows:
06/20/2017  Sold 10 RRC July 21, 2017 $20.00 100% cash-secured Put options @ $.45

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

Net Profit:
(a) Options Income: +$438.55
= ($.45*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $20.00 strike price at July 21,2017 expiration): +$0.00
= ($20.00-$20.00)*1,000 shares

Total Net Profit (If Range Resources stock price is above $20.00 strike price at July 21st options expiration): +$438.55
= (+$438.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If RRC is above $20.00 strike price at July 21st, 2017 options expiration): +2.2%
= +$438.55/$20,000.00
Annualized Return: +25.0%
= (+$438.55/$20,000.00)*(365/32 days)

The downside 'breakeven price' at expiration is at $19.55 ($20.00 - $.45), which is 8.8% below the current market price of $21.44.

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 Range Resources Corp. short Puts position is 74.1%. This compares with a probability of profit of 50.4% for a buy-and-hold of RRC shares over the same time period. Using this probability of profit of 74.1%, the expected value annualized return-on-investment (if held until expiration) is +18.5% (+25.0% * 74.1%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $21.89 ($21.44 + $.45).  This is the price above which it would have been more profitable to simply buy-and-hold Range Resources stock until the July 21st, 2017 options expiration date rather than selling these Put options.