The Covered Calls Advisor does not use margin, so the detailed information below for this position reflect the fact that both of these positions were established using 100% cash securitization for the three Put options sold.
This United Continental investment will yield a +1.9% absolute return in 25 days (which is equivalent to a +27.7% annualized return-on-investment) if UAL closes above the $64.00 strike price on the Apr2015 options expiration date.
This potential return is very nice given the conservative nature (5.5% downside protection from the current $67.70 stock price to the $64.00 strike price) of this position. The implied volatility in the options was relatively high at 39 when this position was established; so the $1.25 price per share received when the Puts were sold is attractive to us option sellers, especially since the level of unknowns between now and the Apr2015 options expiration is relatively low -- UAL has announced their 4th quarter earnings results as well as both their January and February monthly operating results. With about 30% of airline companies' operating earnings coming from fuel expense, airlines 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 at the comparable period during 2014. Their bookings are stable and their pricing remains strong. This situation does not appear to be fully appreciated in the price of many airlines stocks, including United Continental.
The transaction was as follows:
03/24/2015 Sold 3 UAL 100% cash-secured $64.00 Put options @ $1.25
Note: The price of UAL was $67.70 when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $19,200.00
= $64.00*300
Net Profit:
(a) Options Income: +$363.80
= ($1.25*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL is above $64.00 strike price at Apr2015 expiration): +$0.00
= ($64.00-$64.00)*300 shares
Total Net Profit (If UAL is above $64.00 strike price at Apr2015 options expiration): +$363.80
= (+$363.80 +$0.00 +$0.00)
Absolute Return (If UAL is above $64.00 strike price at Apr2015 options expiration): +1.9%
= +$363.80/$19,200.00
Annualized Return: +27.7%
= (+$363.80/$19,200.00)*(365/25 days)
The downside 'breakeven price' at expiration is at $62.75 ($64.00 - $1.25), which is 7.3% below the current market price of $67.70.
The 'crossover price' at expiration is $68.95 ($67.70 + $1.25). This is the price above which it would have been more profitable to simply buy-and-hold UAL until April 17th (the Apr2015 options expiration date) rather than selling these Put options.
