The 36.2 Implied Volatility for these Cigna Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 28.6. So the $306.66 ($1.54 per share x 200 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options. Importantly to the Covered Calls Advisor, there is no earnings report prior to the October 16th options expiration date. The estimated current year P/E (based on the price today when this position was established) is only 8.9, which compares favorably to their prior 5-year average P/E of 13. Furthermore, next year's earnings are estimated to exceed this year's. Cigna's business mix is much improved since its acquisition of Express Scripts in late 2018. Now, 71% of revenue is obtained from their Pharmacy Benefits Manager (PBM) business and 26% from their Health Insurance business. The Covered Calls Advisor likes to invest in companies in industries that are oligopolies, and Express Scripts is #2 in market share of the top 4 companies that now control about 75% of the U.S. PBM market.
As detailed below, for this new Cigna Cash-Secured Puts position there is potential for a +1.0% absolute return in 15 days (equivalent to a +24.3% annualized return-on-investment).
Cigna Corp. (CI) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
10/02/2020 Sold 2 Cigna October 16th, 2020 $155.00 100% Cash-Secured Put options @ $1.54 per share.
Note: Cash-Secured Puts were sold instead of the comparable strike price Covered Calls position since the liquidity was better for the Puts rather than the Call options.
The Covered Calls Advisor does not use margin, so the detailed
information on this position and the potential result detailed below
reflect that this position was established using 100% cash
securitization for the two Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $30,693.34
= ($155.00 - $1.54) *200 shares + $1.34 commission
Net Profit:
(a) Options Income: +$306.66
= ($1.54 *200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Cigna is above $155.00 strike price at the October 16th expiration): +$0.00
= ($155.00 - $155.00) *200 shares
Total Net Profit (If Cigna stock price is above $155.00 strike price at options expiration): +$306.66
= (+$306.66 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Cigna stock price is above $155.00 strike price at the October 16th options expiration) : +1.0%
= +$306.66/$30,693.34
Annualized Return: +24.3%
= (+$306.66/$30,693.34)*(365/15 days)
The
downside 'breakeven price' at expiration is at $153.46 ($155.00 - $1.54),
which is 6.5% below the current market price of $164.21.
