The potential returns are:
1. Avis Budget Group Inc.: +2.6% absolute return in 25 days (which is equivalent to a +37.5% annualized return-on-investment) if CAR stock closes above the $37.50 strike price on the Dec2015 options expiration date.
2. Goldman Sachs Group Inc.: +1.2% absolute return in 25 days (equivalent to a +16.8% annualized return-on-investment)
3. Nationstar Mortgage Holdings Inc.: +3.1% absolute return in 25 days (equivalent to a +45.0% annualized return-on-investment)
4. Polaris Industries Inc.: +1.7% absolute return in 25 days (equivalent to a +24.5% annualized return-on-investment)
Note: the Implied Volatility of the options at the time they were sold (for these four positions) ranged between 23 and 51, so each option exceeded the Covered Calls Advisor's minimum threshold of 20 and thus provides a sufficiently attractive return-on-investment potential relative to the conservative risk profile of each position.
The transactions and potential return-on-investment results for each position are detailed below.
1. Avis Budget Group Inc. (CAR) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
Note: the price of CAR was $38.95 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 Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $11,250.00
= $37.50*300
Note: the price of CAR was $38.95 when these options were sold
Net Profit:
(a) Options Income: +$288.80
= ($1.00*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CAR is above $37.50 strike price at Dec2015 expiration): +$0.00
= ($37.50-$37.50)*300 shares
Total Net Profit (If CAR is above $37.50 strike price at Dec2015 options expiration): +$288.80
= (+$288.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If CAR is above $37.50 strike price at Dec2015 options expiration): +2.6%
= +$288.80/$11,250.00
Annualized Return: +37.5%
= (+$288.80/$11,250.00)*(365/25 days)
The downside 'breakeven price' at expiration is at $36.50 ($37.50 - $1.00), which is 6.3% below the current market price of $38.95.
The 'crossover price' at expiration is $39.95 ($38.95 + $1.00). This is the price above which it would have been more profitable to simply buy-and-hold CAR until Dec 18th (the Dec2015 options expiration date) rather than selling these Put options.
2. Goldman Sachs Group Inc. (GS) -- New Covered Call Position
A $.65 quarterly dividend goes ex-dividend on November 30th. Although very unlikely, if the current time value (i.e. extrinsic value) of $1.69 [$8.75 option premium - ($187.06 stock price - $180.00 strike price)] remaining in the short call option decays below the $.65 dividend amount by November 27th (this Friday -- the business day prior to the ex-div date), then there is a possibility (although very unlikely) that the call option owner would exercise early and call the stock away to capture the dividend. As shown below, two potential return-on-investment results for this position are:
If Early Assignment: +0.8% absolute return (equivalent to +97.7% annualized return for the next 3 days) if the stock is assigned early (business day prior to Nov 30th ex-div date); OR
If Dividend Capture: +1.2% absolute return (equivalent to +16.8% annualized return over the next 25 days) if the stock is assigned at Dec2015 expiration on December 18th. 11/24/2015 Bought 100 GS shares @ $187.06
11/24/2015 Sold 1 GS Dec2015 $180.00 Call option @ $8.75
Note: the price of GS was $187.21 when the option was sold
11/30/2015 Upcoming ex-dividend of $.65 per share
Two possible overall performance results (including commissions) for this Goldman Sachs covered call position are as follows:
Stock Purchase Cost: $18,714.95
= ($187.06*100+$8.95 commission)
Net Profit:
(a) Options Income: +$865.30
= ($8.75*100 shares) - $9.70 commissions
(b) Dividend Income (If option exercised early on business day prior to Nov 30th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Dec2015 expiration): +$65.00
= ($.65 dividend per share x 100 shares)
(c) Capital Appreciation (If stock assigned early on Nov 27th): -$714.95
+($180.00-$187.06)*100 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $180.00 at Dec2015 expiration): -$714.95
+($180.00-$187.06)*100 - $8.95 commissions
+($180.00-$187.06)*100 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $180.00 at Dec2015 expiration): -$714.95
+($180.00-$187.06)*100 - $8.95 commissions
Total Net Profit (If option exercised on day prior to Nov 30th ex-div date): +$150.35
= (+$865.30 +$0.00 -$714.95); or
Total Net Profit (If stock assigned at $180.00 at Dec2015 expiration): +$215.35
= (+$865.30 +$65.00 -$714.95)
1. Absolute Return [If option exercised this Friday (business day prior to ex-div date)]: +0.8%
= +$150.35/$18,714.95
Annualized Return (If option exercised early): +97.7%
= (+$150.35/$18,714.95)*(365/3 days); OR
2. Absolute Return (If stock assigned at $180.00 at Dec2015 expiration): +1.2%
= +$215.35/$18,714.95
Annualized Return: +16.8%
= (+$215.35/$18,714.95)*(365/25 days)
As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment. These returns will be achieved as long as the stock is above the $180.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $178.31 ($187.06 -$8.75) provides a substantial 5.0% downside protection from today's purchase price.
3. Nationstar Mortgage Holdings Inc. (NSM) -- New 100% Cash-Secured Puts Position
The transaction was as follows: 11/24/2015 Sold 4 NSM Dec2015 $12.00 100% cash-secured Put options @ $.40
Note: the price of NSM was $12.89 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 Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $4,800.00
= $12.00*400
Note: the price of NSM was $12.89 when these options were sold
Net Profit:
(a) Options Income: +$148.05
= ($.40*400 shares) - $11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NSM is above $12.00 strike price at Dec2015 expiration): +$0.00
= ($12.00-$12.00)*400 shares
Total Net Profit (If NSM is above $12.00 strike price at Dec2015 options expiration): +$148.05
= (+$148.05 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If NSM is above $12.00 strike price at Dec2015 options expiration): +3.1%
= +$148.05/$4,800.00
Annualized Return: +45.0%
= (+$148.05/$4,800.00)*(365/25 days)
The downside 'breakeven price' at expiration is at $11.60 ($12.00 - $.40), which is 10.0% below the current market price of $12.89.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this Nationstar Mortgage short Puts position is 71%. This compares with a probability of profit of 50.3% for a buy-and-hold of Nationstar stock over the same time period. Using this probability of profit of 71%, the expected value annualized return-on-investment (if held until expiration) is +31.9% (+45.0% * 71%).
The 'crossover price' at expiration is $13.29 ($12.89 + $.40). This is the price above which it would have been more profitable to simply buy-and-hold NSM until Dec 18th (the Dec2015 options expiration date) rather than selling these Put options.
4. Polaris Industries Inc. (PII) -- New Covered Call Position
11/24/2015 Bought 100 PII shares @ $103.92
11/24/2015 Sold 1 PII Dec2015 $100.00 Call option @ $5.32
11/27/2015 Upcoming ex-dividend of $.53 per share
A possible overall performance result (including commissions) for this Polaris covered call position is as follows:
Stock Purchase Cost: $10,400.95
= ($103.92*100+$8.95 commission)
Net Profit:
(a) Options Income: +$522.30
= ($5.32*100 shares) - $9.70 commissions
(b) Dividend Income (If stock assigned at Dec2015 expiration): +$53.00
= ($.53 dividend per share x 100 shares)
(c) Capital Appreciation (If stock assigned at $100.00 strike price at Dec2015 expiration): -$400.95
+($100.00-$103.92)*100 - $8.95 commissions
+($100.00-$103.92)*100 - $8.95 commissions
Total Net Profit (If stock assigned at $100.00 at Dec2015 expiration): +$174.35
= (+$522.30 +$53.00 -$400.95)
Absolute Return (If stock assigned at $100.00 at Dec2015 expiration): +1.7%
Absolute Return (If stock assigned at $100.00 at Dec2015 expiration): +1.7%
= +$174.35/$10,400.95
Annualized Return: +24.5%
= (+$174.35/$10,400.95)*(365/25 days)
If the stock declines below the strike price, the breakeven price of $98.07 ($103.92 -$5.32 -$.53) provides a substantial 5.6% downside protection from today's purchase price.
