The Covered Calls Advisor does not use margin, so the detailed information below for these position reflect the fact that both of these positions were established using 100% cash securitization for the Put options sold.
As shown below, some potential results are as follows:
- Apple Inc. investment will provide a +0.6% absolute return in 9 days (which is equivalent to a +25.4% annualized return) if the stock closes above the $122.00 strike price on the April 9th expiration date.
- Baidu Inc. investment will provide a +1.9% absolute return in 24 days (which is equivalent to a +28.2% annualized return) if the stock closes above the $205.00 strike price on the April 17th expiration date.
These potential return-on-investment results are attractive to us option sellers since they are relatively conservative investments -- the breakeven point provides 2.7% downside protection in the Apple position and 3.2% downside protection in the Baidu position. The implied volatility in both options positions was approximately 24 when they were established and there is no quarterly earnings reports prior to their expiration.
The details of the associated transactions and a potential return-on-investment result are as follows:
1. Apple Inc. (AAPL)
03/25/2015 Sold 2 AAPL Apr 2nd $122.00 Put Options @ $.86
Note: the price of AAPL was $124.46 today when these options were sold.
Apple earnings should continue to be substantially higher for the next two quarterly reports compared with the prior year since they will continue to benefit from sales of their new iPhone 6 products, similar to the dramatic improvement shown when they reported last quarter's results.
A possible overall performance result (including commissions) for these short Apple Inc. Put options is as follows:
Stock Purchase Cost: $24,408.95
= ($122.00*200+$8.95 commission)
Net Profit:
(a) Options Income: +$161.55
= 200*$.86 - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL assigned at $122.00) = -$8.95
= ($122.00-$122.00)*200 - $8.95 commissions
Total Net Profit (If AAPL assigned at $122.00): +$152.60
= (+$161.55 +$0.00 -$8.95)
Absolute Return if Assigned (at $122.00 strike price): +0.6%
= +$152.60/$24,408.95
Annualized Return If Assigned (ARIA): +25.4%
= (+$152.60/$24,408.95)*(365/9 days)
The downside 'breakeven price' at expiration is at $121.14 ($122.00 - $.86), which is 2.7% below the current market price of $124.46.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until the Apr 9th, 2015 options expiration) for this Apple Inc.short Puts position is 62%. This compares with a probability of profit of 50.3% for a buy-and-hold of Apple Inc. stock over the same time period. Using this probability of profit of 62%, the Expected Value annualized ROI of this investment (if held until expiration) is +15.7% (+25.4% * 62%).
The 'crossover price' at expiration is $125.32 ($124.46 + $.86). This is the price above which it would have been more profitable to simply buy-and-hold Apple stock for 9 days (until the April 2nd options expiration date) rather than establish this short Put options position.
2. Baidu Inc.(BIDU)
03/25/2015 Sold 2 BIDU Apr2015 $205.00 Put Options @ $3.90
Note: the price of BIDU was $207.85 today when these two Put options were sold.
A simple, but mostly accurate, way to understand Baidu's business model is to know that they are often termed "the Google of China". They are dominating the rapidly growing (30%+) internet search market in China with a 75% market share. They are reasonably valued at 35 times their trailing-twelve-months earnings and in addition to basic search, there is huge future growth potential in mobile and video. Baidu is the closest thing to a no-brainer investment for the long term as currently exists in the large-cap company universe; so I expect to continue to sell BIDU options each month for several years to come .
A possible overall performance result (including commissions) for these Baidu short Put options is as follows:
Stock Purchase Cost: $41,008.95
= ($205.00*200+$8.95 commission)
Net Profit:
(a) Options Income: +$769.55
= 200*$3.90 - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BIDU assigned at $205.00) = -$8.95
= ($205.00-$205.00)*200 - $8.95 commissions
Total Net Profit (If Baidu assigned at $205.00): +$760.60
= (+$769.55 +$0.00 -$8.95)
Absolute Return if Assigned (at $205.00 strike price): +1.9%
= +$760.60/$41,008.95
Annualized Return If Assigned (ARIA): +28.2%
= (+$760.60/$41,008.95)*(365/24 days)
The downside 'breakeven price' at expiration is at $201.10 ($205.00 - $3.90), which is 3.2% below the current market price of $207.85.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Apr2015 options expiration) for this Baidu position is 72%. This compares with a probability of profit of 50.1% for a buy-and-hold of BIDU over the same time period. Using this probability of profit of 72%, the Expected Value annualized ROI of this investment (if held until expiration) is +20.3% = (+28.2% * 72%).
The 'crossover price' at expiration is $211.75 ($207.85 + $3.90). This is the price above which it would have been more profitable to simply buy-and-hold BIDU stock until April 17th (the Apr2015 options expiration date) rather than establish this short Put options position.
