Today, a good-til-cancelled order was placed to sell two July 20th, 2018 Deere & Co. (ticker DE) Put options at the $138.00 strike price for $2.68 per share. At 10:45am, the order was executed when the stock was at $139.28.
As detailed below, there is potential for a +1.9% absolute
return in 16 days (equivalent to a +43.8% annualized
Deere & Co. (DE) -- New 100% Cash-Secured Puts Position
With the recent increase in international trade tariff threats, agricultural stocks like John Deere have seen a swift decline in price accompanied by a substantial rise in the implied volatility of options, so the $2.68 price per share received when the Puts
were sold is an attractive premium to receive for these out-of-the-money Put
Selling 100% Cash-Secured Puts is synthetically equivalent to Covered Calls. In this case, Puts were chosen because of their better options liquidity (and thus tighter bid/ask spread). The open interest at the $138.00 strike price for the Calls was 946 contracts but only 109 for their counterpart Call options.
The transaction was as follows:
07/05/2018 Sold 2 DE July 20, 2018 $138.00 100% cash-secured Put options @ $2.68
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 two Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $27,600.00
= $138.00*200 shares
(a) Options Income: +$529.71
= ($2.68*200 shares) - $6.29 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Deere stock is above $138.00 strike price at July 20,2018 expiration): +$0.00
= ($138.00-$138.00)*200 shares
Total Net Profit (If Deere stock price is above $138.00 strike price at July 20th options expiration): +$529.71
= (+$529.71 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Deere stock is above $138.00 strike price at July 20th, 2018 options expiration): +1.9%
Annualized Return: +43.8%
= (+$529.71/$27,600.00)*(365/16 days)
downside 'breakeven price' at expiration is at $135.32 ($138.00 - $2.68),
which is 2.8% below the current market price of $139.28.
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 20th options expiration) for
this John Deere & Co. short Puts position is 57.4%. This compares with a
profit of 50.4% for a buy-and-hold of Deere shares over the same
Using this probability of profit of 57.4%, the expected value annualized return-on-investment (if held until expiration) is +25.1% (+43.8% *
57.4%), an attractive risk/reward profile for this relatively conservative investment.