As detailed below, the Nationstar Mortgage Holdings Inc. investment will yield a +4.9% absolute return in 39 days (which is equivalent to a +46.2% annualized return-on-investment) if NSM stock is unchanged at $11.68. If the stock value rises above the $12.00 strike at the Jan 15th expiration, a +7.6% absolute return (+71.2% annualized) will be achieved.
The implied volatility in the options was 49 when this position was established; so the $.95 price per share received when the Puts were sold is a nice premium to receive for us option sellers.
1. Nationstar Mortgage Holdings Inc. (NSM) -- New 100% Cash-Secured Puts Position
The transaction was as follows: 12/08/2015 Sold 3 NSM Jan2016 $12.00 100% cash-secured Put options @ $.95
Note: the price of NSM was $11.68 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.
Two possible overall performance results (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $3,600.00
= $12.00*300
Note: the price of NSM was $11.68 when these options were sold
Net Profit:
(a) Options Income: +$273.80
= ($.95*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NSM is unchanged at $11.68 at Jan2016 expiration): -$96.00
= ($11.68 -$12.00)*300 shares; or
(c) Capital Appreciation (If NSM is above $12.00 strike price at Jan2016 expiration): +$0.00
= ($12.00-$12.00)*300 shares
Total Net Profit (If NSM is unchanged at $11.68 at Jan2016 expiration): +$177.80
= (+$273.80 options income +$0.00 dividend income -$96.00 capital appreciation); or
Total Net Profit (If NSM is above $12.00 strike price at Jan2016 options expiration): +$273.80
= (+$273.80 options income +$0.00 dividend income +$0.00 capital appreciation)
1. Absolute Return (If NSM is unchanged at $11.68 at Jan2016 expiration): +4.9%
= +$177.80/$3,600.00
Annualized Return if Unchanged: +46.2%
= (+$177.80/$3,600.00)*(365/39 days); or
2. Absolute Return if Assigned (If NSM is above $12.00 strike price at Jan2016 options expiration): +7.6%
= +$273.80/$3,600.00
Annualized Return: +71.2%
= (+$273.80/$3,600.00)*(365/39 days)
The downside 'breakeven price' at expiration is at $11.05 ($12.00 - $.95), which is 8.1% below the current market price of $11.68.
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 Nationstar Mortgage short Puts position is 46%. 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 46%, the expected value annualized return-on-investment (if held until expiration and the stock price is unchanged at $11.68) is +21.3% (+46.2% * 46%).
The 'crossover price' at expiration is $12.63 ($11.68 + $.95). This is the price above which it would have been more profitable to simply buy-and-hold NSM until Jan 15th (the Jan2016 options expiration date) rather than selling these Put options.
