As detailed below, the United Continental investment will yield a +3.4% absolute return in 36 days (which is equivalent to a +34.3% annualized return-on-investment) if UAL closes above the $55.00 strike price on the Nov2015 options expiration date.
This potential return is excellent given the 2.9% downside protection (from the $56.67 stock price to the $55.00 strike price) when the position was established. The implied volatility in the options was high at 37 when this position was established; so the $1.90 price per share received when the Puts were sold is very attractive to us option sellers. There is some uncertainty in that 3rd quarter earnings will be announced next Thursday, but Delta has already announced earnings, which were slightly above analysts' estimates. With about 30% of airline companies' operating earnings coming from fuel expense, they airlines will likely continue to achieve substantial earnings benefits (compared with last year) from oil prices that are substantially below their prior year pricing. Their bookings and their pricing are reasonably stable. This situation does not appear to be fully appreciated in the price of airlines stocks, including United Continental.
The transaction was as follows:
10/16/2015 Sold 3 UAL 100% cash-secured $55.00 Put options @ $1.90
Note: The price of UAL was $56.67 today when this transaction was executed.
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 three Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $16,500.00
= $55.00*300
Net Profit:
(a) Options Income: +$558.80
= ($1.90*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL is above $55.00 strike price at Nov2015 expiration): +$0.00
= ($55.00-$55.00)*300 shares
Total Net Profit (If UAL is above $55.00 strike price at Nov2015 options expiration): +$558.80
= (+$558.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If UAL is above $55.00 strike price at Nov2015 options expiration): +3.4%
= +$558.80/$16,500.00
Annualized Return: +34.3%
= (+$558.80/$16,500.00)*(365/36 days)
The downside 'breakeven price' at expiration is at $53.10 ($55.00 - $1.90), which is 6.3% below the current market price of $56.67.
The 'crossover price' at expiration is $58.57 ($56.67 + $1.90). This is the price above which it would have been more profitable to simply buy-and-hold UAL until Nov 20th (the Nov2015 options expiration date) rather than selling these Put options.
