As detailed below, The Walt Disney Company investment will yield a +1.7% absolute return in 26 days (which is equivalent to a +24.5% annualized return-on-investment) if Disney stock closes above the $102.00 strike price on the Jan 15th options expiration date.
This potential return is very nice given the downside protection (from the $105.86 stock price to the $102.00 strike price) when the position was established. The implied volatility in the options was 31 when this position was established; so the $1.83 price per share received when the Puts were sold is a nice premium to receive for us option sellers.
1. The Walt Disney Company (DIS) -- New 100% Cash-Secured Puts Position
12/21/2015 Sold 2 DIS Jan2016 $102.00 100% cash-secured Put options @ $1.83Note: the price of DIS was $105.86 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: $20,400.00
= $102.00*200
Note: the price of Disney was $105.86 when these options were sold
Net Profit:
(a) Options Income: +$356.55
= ($1.83*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DIS is above $102.00 strike price at the Jan2016 expiration): +$0.00
= ($102.00-$102.00)*200 shares
Total Net Profit (If Disney stock is above $102.00 strike price at Jan2016 options expiration): +$356.55
= (+$356.55 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Disney is above $102.00 strike price at Jan2016 options expiration): +1.7%
= +$356.55/$20,400.00
Annualized Return: +24.5%
= (+$356.55/$20,400.00)*(365/26 days)
The downside 'breakeven price' at expiration is at $100.17 ($102.00 - $1.83), which is 5.2% below the current market price of $105.68.
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 Disney short Puts position is 70%. This compares with a probability of profit of 50.2% for a buy-and-hold of The Walt Disney Company stock over the same time period. Using this probability of profit of 70%, the expected value annualized return-on-investment (if held until expiration) is +17.2% (+24.5% * 70%), an attractive risk/reward profile for this conservative investment.
The 'crossover price' at expiration is $107.51 ($105.68 + $1.83). This is the price above which it would have been more profitable to simply buy-and-hold Disney stock until the Jan2016 options expiration date rather than selling these Put options.
