As detailed below, the Dow Chemical investment will yield a +1.9% absolute return in 37 days (which is equivalent to a +19.1% annualized return-on-investment) if Dow Chemical closes above the $43.00 strike price on the Sep2015 options expiration date.
This potential return is very good given the substantial 5.0% downside protection (from the current $45.25 stock price to the $43.00 strike price) when the position was established. The implied volatility in the options was relatively high at 32 when this position was established; so the $.87 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 Sep2015 options expiration is relatively low, given that DOW has already announced their 2nd quarter earnings results.
The transaction was as follows:
08/13//2015 Sold 3 DOW Sep2015 $43.00 100% cash-secured Put options @ $.87
Note: The price of DOW was $45.25 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 this position was 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: $12,908.95
= $43.00*300 + $8.95
Net Profit:
(a) Options Income: +$249.80
= ($.87*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DOW is above $43.00 strike price at Sep2015 expiration): +$0.00
= ($43.00-$43.00)*300 shares
Total Net Profit (If DOW is above $43.00 strike price at Sep2015 options expiration): +$249.80
= (+$249.80 +$0.00 +$0.00)
Absolute Return (If DOW is above $43.00 strike price at Sep2015 options expiration): +1.9%
= +$249.80/$12,908.95
Annualized Return (If DOW is above $43.00 at expiration): +19.1%
= (+$249.80/$12,908.95)*(365/37 days)
The downside 'breakeven price' at expiration is at $42.13 ($43.00 - $.87), which is 6.9% below the current market price of $45.25.
The 'crossover price' at expiration is $46.12 ($45.25 + $.87). This is the price above which it would have been more profitable to simply buy-and-hold Dow Chemical stock until Sept 18th (the Sep2015 options expiration date) rather than selling these Put options.
