As detailed below, the United Continental investment will yield a +4.1% absolute return in 41 days (which is equivalent to a +36.5% annualized return-on-investment) if UAL closes above the $60.00 strike price on the Mar2015 options expiration date.
This potential return is outstanding given the 8.5% downside protection (from the $65.60 stock price to the $60.00 strike price) when the position was established. The implied volatility in the options was a very high 57 when this position was established; so the $2.50 price per share received when the Puts were sold is very attractive to us option sellers, especially since the level of unknowns between now and the Mar2015 options expiration is relatively low, given that UAL has already announced their 4th quarter earnings results as well as their January operating results. With about 30% of airline companies' operating earnings coming from fuel expense, they will likely continue to achieve substantial earnings benefits (compared with last year) for at least the next two quarters from oil prices that are substantially below where they were in the prior year. Their bookings are stable and their pricing remains strong. This situation does not appear to be fully appreciated in the price of airlines stocks, including United Continental.
The transaction was as follows:
02/09/2015 Sold 3 UAL 100% cash-secured $60.00 Put options @ $2.50
Note: The price of UAL was $65.60 when this transaction was executed.
The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that both of these positions were established using 100% cash securitization for the three Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $18,000.00
= $60.00*300
Net Profit:
(a) Options Income: +$738.80
= ($2.50*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL is above $60.00 strike price at Mar2015 expiration): +$0.00
= ($60.00-$60.00)*300 shares
Total Net Profit (If UAL is above $60.00 strike price at Mar2015 options expiration): +$738.80
= (+$738.80 +$0.00 +$0.00)
Absolute Return (If UAL is above $60.00 strike price at Mar2015 options expiration): +4.1%
= +$738.80/$18,000.00
Annualized Return (If UAL is above $60.00 at expiration): +36.5%
= (+$738.80/$18,000.00)*(365/41 days)
The downside 'breakeven price' at expiration is at $57.50 ($60.00 - $2.50), which is 12.3% below the current market price of $65.60.
The 'crossover price' at expiration is $68.10 ($65.60 + $2.50). This is the price above which it would have been more profitable to simply buy-and-hold UAL until March 20th (the Mar2015 options expiration date) rather than selling these Put options.
