As detailed below, the Time Warner Inc. investment will yield a +1.6% absolute return in 12 days (which is equivalent to a +47.9% annualized return-on-investment) if TWX closes above the $67.50 strike price on the Nov2015 options expiration date.
This potential return is excellent given the 1.8% downside protection (from the $68.74 stock price to the $67.50 strike price) when the position was established. The implied volatility in the options was relatively high at about 32 when this position was established; so the $1.10 price per share received when the Puts were sold is very attractive to us option sellers.
The transaction was as follows:
11/09/2015 Sold 3 TWX 100% cash-secured $67.50 Put options @ $1.10
Note: The price of TWX was $68.74 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 three Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,250.00
= $67.50*300
Net Profit:
(a) Options Income: +$318.80
= ($1.10*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TWX is above $67.50 strike price at Nov2015 expiration): +$0.00
= ($67.50-$67.50)*300 shares
Total Net Profit (If TWX is above $67.50 strike price at Nov2015 options expiration): +$318.80
= (+$318.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If TWX is above $67.50 strike price at Nov2015 options expiration): +1.6%
= +$318.80/$20,250.00
Annualized Return: +47.9%
= (+$318.80/$20,250.00)*(365/12 days)
The downside 'breakeven price' at expiration is at $66.40 ($67.50 - $1.10), which is 3.4% below the current market price of $68.74.
The 'crossover price' at expiration is $69.84 ($68.74 + $1.10). This is the price above which it would have been more profitable to simply buy-and-hold TWX until Nov 20th (the Nov2015 options expiration date) rather than selling these Put options.
