New Position Established in ProShares Short S&P 500 ETF

Late this morning, when the S&P 500 (ticker SPY) had risen by 1.8% from yesterday's close to $288.63, the Covered Calls Advisor wanted to establish a small contrarian position on the direction of the overall stock market.  During the past six weeks since the March 23rd closing low of 222.95, SPY has risen dramatically by 29.5%, a level that I believe is at the high end of its reasonable range.  Given the likely gradual, prolonged economic recovery forthcoming, a pullback from this current level of the S&P 500 seems most likely in the near-term future.   

With SPY at $288.63 per share, establishing one in-the-money Covered Call on SPY would have required about a $25,000 cost basis investment.  But I only wanted to establish a smaller position today not exceeding about $10,000.  Fortunately, instead of SPY, I could obtain a comparable position to a SPY Covered Call but with much less cash outlay by investing via ProShares Short S&P 500 ETF (ticker SH).  SH is an "inverse" ETF, meaning that it tracks SPY in the opposite direction -- it moves down by almost exactly the same percentage as SPY moves up (and vice versa).   So, SPY in-the-money (strike price below the equity price) Covered Calls are comparable to selling in-the-money (equity price above the stock price) cash-secured Put options. However, the price per share of SH is less than 10% that of SPY.  So, when SH was trading at $24.31 per share (and SPY was $288.63), the Covered Calls Advisor sold 4 SH May 15th, 2020 $25.00 100% cash-secured Put options at $.95 per share and at a total cost close to the approximate $10,000 investment that was preferred.

Although there are an unlimited number of possible return-on-investment outcomes (depending on the price of SH at options expiration on May 15th), in order to provide you a better understanding of the potential results from this position, the return-on-investment results under three different scenarios are provided below: (1) If SH increases by 3.0% (i.e. SPY decreases by 3.0%); (2) If SH decreases by 3.0% (SPY increases by 3.0%); and (3) If SH price is unchanged at $24.31 (SPY price unchanged at $288.63).


As detailed below, the return-on-investment results for each of these three scenarios is: 

1. If SH increases by 3.0% (SPY decreases by 3.0%) -- +3.8% absolute return in 11 days (equivalent to a +126.1% annualized return-on-investment)
2. If SH decreases by 3.0% (SPY increases by 3.0%) -- -1.9% absolute return in 11 days (equivalent to a -62.4% annualized return-on-investment)
3. If SH is unchanged at $24.31 (SPY unchanged at $288.63) -- +1.0% absolute return in 11 days (equivalent to a +34.5% annualized return-on-investment)

ProShares Short S&P 500 ETF (SH) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
05/05/2020 Sold 4 SH May 15th, 2020 $25.00 100% Cash-Secured Put options @ $.95 per share 
Note: The Open Interest in these Puts was 2,434 contracts

Three possible overall performance results (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $10,002.68
= $25.00 per share * 400 shares + $2.68 commissions

1. If SH increases by 3.0% (SPY decreases by 3.0%): Price per share of SH at options expiration is $25.04 = ($24.31 + 3.0%)
Net Profit Components:
(a) Options Income: +$380.00
= $.95 * 400 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SH is above $25.00 strike price at May 15th expiration): +$0.00
= ($25.00 - $25.00) * 400 shares

Potential Total Net Profit (If SH is above $25.00 strike price at May 15th options expiration): +$380.00
= (+$380.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +3.8%
= +$380.00/$10,002.68
Equivalent Annualized Return: +126.1%
= (+$380.00/$10,002.68)*(365/11 days)


2. If SH decreases by 3.0% (SPY decreases by 3.0%): Price per share of SH at options expiration is $23.58 = ($24.31 - 3.0%)
Net Profit Components:
(a) Options Income: +$380.00
= $.95 * 400 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SH decreases by 3.0%): -$568.00
= [$23.58 price per share of SH at options expiration - $25.00 price of shares assigned (i.e. purchased) at options expiration)] * 400 shares

Potential Total Net Profit (If SH declines to $23.58 at May 15th options expiration): -$188.00
= (+$380.00 options income +$0.00 dividend income - $568.00 capital appreciation)

Absolute Return: -1.9%
= -$188.00/$10,002.68
Equivalent Annualized Return: -62.4%
= (-$188.00/$10,002.68)*(365/11 days)


3. If SH price is unchanged:  $24.31 price per share of SH at options expiration
Net Profit Components:
(a) Options Income: +$380.00
= $.95 * 400 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SH is unchanged at $24.31 per share at May 15th expiration): -$276.00
= [$24.31 at expiration - $25.00 price of shares assigned (i.e. purchased) at options expiration)] * 400 shares

Potential Total Net Profit (If SH is unchanged at $24.31 at May 15th options expiration): +$104.00
= (+$380.00 options income +$0.00 dividend income - $276.00 capital appreciation)

Absolute Return: +1.0%
= +$104.00/$10,002.68
Equivalent Annualized Return: +34.5%
= (+$104.00/$10,002.68)*(365/11 days)

The Covered Calls Advisor has invested via Covered Calls for about four decades now and Covered Calls investing has been very good for me (and thus also for my family). Consequently, this blog is written to encourage others to learn about and successfully deploy Covered Calls investing as a primary investing strategy. Hopefully, your reading and fully understanding this particular position is especially helpful to your ongoing understanding of Covered Calls (and their counterpart 100% Cash-Secured Puts). As always, please email me with any comments or questions related to this post or anything else related to Covered Calls investing.

Best Regards, Stay Safe, and Godspeed,

Jeff Partlow