As detailed below, the AmTrust Financial Services Inc. investment will yield a +1.7% absolute return in 29 days (which is equivalent to a +23.4% annualized return-on-investment) if AFSI closes above the $57.50 strike price on the Jan 15th options expiration date.
This potential return is very nice given the downside protection (from the $60.70 stock price to the $57.50 strike price) when the position was established. The implied volatility in the options was 32 when this position was established; so the $1.00 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
12/18/2015 Sold 3 AFSI Jan2016 $57.50 100% cash-secured Put options @ $1.00
Note: the price of AFSI was $60.70 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: $17,250.00
= $57.50*300
Note: the price of AmTrust Financial was $60.70 when these options were sold
Net Profit:
(a) Options Income: +$289.80
= ($1.00*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AFSI is above $57.50 strike price at the Jan2016 expiration): +$0.00
= ($57.50-$57.50)*300 shares
Total Net Profit (If AFSI is above $57.50 strike price at Jan2016 options expiration): +$289.80
= (+$289.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If AFSI is above $57.50 strike price at the Jan2016 options expiration): +1.7%
= +$289.80/$17,250.00
Annualized Return: +23.4%
= (+$289.80/$17,250.00)*(365/29 days)
The downside 'breakeven price' at expiration is at $56.50 ($57.50 - $1.00), which is 6.9% below the current market price of $60.70.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this AFSI short Puts position is 73%. This compares with a probability of profit of 50.3% for a buy-and-hold of AmTrust Financial stock over the same time period. Using this probability of profit of 73%, the expected value annualized return-on-investment (if held until expiration) is +17.1% (+23.4% * 73%), an attractive risk/reward profile for this conservative investment.
The 'crossover price' at expiration is $61.70 ($60.70 + $1.00). This is the price above which it would have been more profitable to simply buy-and-hold AmTrust Financial until the Jan2016 options expiration date rather than selling these Put options.
