As detailed below, there is potential for a +1.5% absolute return in 16 days (equivalent to a +33.5% annualized return-on-investment).
Devon Energy Corp. (DVN) -- New 100% Cash-Secured Puts Position
This position was established when the price of Devon Energy Corp was $37.21 (3.3%
downside protection to the strike price) and 16 days remaining until the
options expiration date.The implied volatility of the Put options was 33.3 when this position was established; so the $.54 price received per share received when the Puts were sold is a nice premium to receive for these 3.3% out-of-the-money Put options.
The transaction was as follows:
05/04/2017 Sold 10 DVN May2017 $36.00 100% cash-secured Put options @ $.54
Note: the price of DVN was $37.21 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 ten Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $36,000.00
= $36.00*1,000
Note: the price of DVN was $37.21 when these options were sold
Net Profit:
(a) Options Income: +$528.55
= ($.54*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DVN is above $36.00 strike price at May2017 expiration): +$0.00
= ($36.00-$36.00)*1,000 shares
Total Net Profit (If Devon Energy stock price is above $36.00 strike price at May2017 options expiration): +$528.55
= (+$528.55 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If DVN is above $36.00 strike price at May2017 options expiration): +1.5%
= +$528.55/$36,000.00
Annualized Return: +33.5%
= (+$528.55/$36,000.00)*(365/16 days)
The downside 'breakeven price' at expiration is at $35.46 ($36.00 - $.54), which is 4.7% below the current market price of $37.21.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the May 19th, 2017 options expiration) for this Devon Energy Corp short Puts position is 69.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of DVN shares over the same time period. Using this probability of profit of 69.8%, the expected value annualized return-on-investment (if held until expiration) is +23.4% (+33.5% * 69.8%), an attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $37.75 ($37.21 + $.54). This is the price above which it would have been more profitable to simply buy-and-hold Devon stock until the May 19th, 2017 options expiration date rather than selling these Put options.
