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
Range Resources Corp. (RRC) -- New 100% Cash-Secured Puts Position
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
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
(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%
Annualized Return: +25.0%
= (+$438.55/$20,000.00)*(365/32 days)
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
profit of 50.4% for a buy-and-hold of RRC shares over the same
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.
'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.