This is a Weekly position and reflects that the Covered Calls Advisor would be very willing to purchase Delta shares at $44.00 (for future covered calls investments) upon the close of business next Friday if the stock continues to decline to below the $44.00 strike price. If the stock remains above $44 by the market close on the options expiration date next Friday, then the $213.55 profit detailed below (a 1.5% absolute return-on-investment result in only 8 days) will have been achieved.
A conservative (3% out-of-the-money) short Puts position was established. The investment thesis is that for at least the next six months, the cost of oil will continue to be substantially below the prior year levels. This is a tremendous tailwind (pun intended) to the airline companies, where oil is about 30% of their expenses. So even with stagnant passenger bookings versus last year, quarterly earnings are expanding dramatically and have yet to be fully appreciated in the stock price. Even with relatively stagnant passenger bookings versus last year, the domestic airlines remain an oligarchy and will continue to benefit greatly from their commitment to maintain pricing (including those obnoxious extra fees we all despise) near current very profitable levels. Another benefit of this position is that the implied volatility in this weekly option remains elevated despite Delta having already reported earnings (so there will be no earnings announcement prior to the March 6th options expiration date).
This transaction and the potential return-on-investment result is:
1. Delta Air Lines Inc. (DAL) -- New Position
The transaction was as follows:
02/27/2015 Sold 3 Delta Air Lines Inc. Mar 6, 2015 $44.00 Puts @ $.69
Note: The price of DAL was $45.35 when this transaction was executed.
The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.
A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $13,200.00
Note: the price of DAL was $45.35 when these Put options were sold.
(a) Options Income: +$195.80
= ($.69*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DAL is above $44.00 strike price at Mar 6th, 2015 expiration): +$0.00
= ($44.00-$44.00)*300 shares
Total Net Profit (If DAL is above $44.00 strike price upon next Friday's options expiration): +$195.80
= (+$195.80 +$0.00 +$0.00)
Absolute Return (If DAL is above $44.00 strike price at Mar 6th, 2015 options expiration): +1.5%
Annualized Return (If DAL is above $44.00 at expiration): +67.7%
= (+$195.80/$13,200.00)*(365/8 days)
The downside 'breakeven price' at expiration is at $43.31 ($44.00 - $.69), which is 4.5% below the current market price of $45.35.
The 'crossover price' at expiration is $46.04 ($45.35 + $.69). This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until March 6th (the March 6, 2015 options expiration date) rather than selling these Put options.