As detailed below, the AmTrust Financial Services Inc. investment will yield a +1.0% absolute return in 16 days (which is equivalent to a +24.3% annualized return-on-investment) if AFSI closes above the $60.00 strike price on the Dec 18th options expiration date.
This potential return is very nice given the downside protection (from the $62.55 stock price to the $60.00 strike price) when the position was established. The implied volatility in the options was 30 when this position was established; so the $.65 price per share received when the Puts were sold is a nice premium to receive for us option sellers.
1. AmTrust Financial Services Inc.(AFSI) -- New 100% Cash-Secured Puts Position
12/03/2015 Sold 3 AFSI Dec2015 $60.00 100% cash-secured Put options @ $.65
Note: the price of AFSI was $62.55 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: $18,000.00
= $60.00*300
Note: the price of AmTrust Financial was $62.55 when these options were sold
Net Profit:
(a) Options Income: +$184.80
= ($.65*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AFSI is above $60.00 strike price at Dec2015 expiration): +$0.00
= ($60.00-$60.00)*300 shares
Total Net Profit (If AFSI is above $60.00 strike price at Dec2015 options expiration): +$184.80
= (+$184.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If AFSI is above $60.00 strike price at Dec2015 options expiration): +1.0%
= +$184.80/$18,000.00
Annualized Return: +23.4%
= (+$184.80/$18,000.00)*(365/16 days)
The downside 'breakeven price' at expiration is at $59.35 ($60.00 - $.65), which is 5.1% below the current market price of $62.55.
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 AFSI short Puts position is 74%. This compares with a probability of profit of 50.3% for a buy-and-hold of AmTrust stock over the same time period. Using this probability of profit of 74%, the expected value annualized return-on-investment (if held until expiration) is +18.0% (+24.3% * 74%), an attractive risk/reward profile for this conservative investment.
The 'crossover price' at expiration is $63.20 ($62.55 + $.65). This is the price above which it would have been more profitable to simply buy-and-hold AmTrust Financial until the Dec2015 options expiration date rather than selling these Put options.
