EFTA00620125.pdf

Equity Options: AAPL Cash-Secured Put Catalyst When should investors consider a cash-secured On April 26, Apple, Inc. (AAPL, B17, $120) announced that 2Q put strategy? sales were down 13% ending its streak of 51 consecutive Investors can use a cash-secured put strategy to achieve two quarters of sales growth. Despite this down quarter, BAML investment objectives: Research analyst Wamsi Mohan reiterated his Buy rating on the stock based on a strong capital return program , Android switch 1. To generate income. Selling a cash-secured put is often rate, and interest in iPhones/demand for iPhone 7. Mohan did compared to entering a limit order to buy the stock below the lower his PO to $120 from $130 as the company's management current price, but the cash-secured put has the advantage of guided lower on revenue. generating income while the investor waits. Sales Idea: 2. To acquire a stock at a price lower than the current (All terms are indicative as of 04/27/2016. Actual trade subject market price. By using out-of-the-money options, an to current pricing.) investor can acquire the stock at a price lower than the current market price. Although the investor's primary Apple, Inc. (AAPL, B17, $120) trading @ 96.65 investment objective may not be to purchase the • Sell 10 AAPL 15.lul'16 95.00 Put @ $3.15 underlying stock, he or she should not be adverse to buying • Maintain $95,000 cash in the account the stock. This strategy can be employed over time to If the stock is above the strike at expiration acquire and build a portfolio for the long term. Note that • Actual % return: 3.36%* although the investor may acquire the stock below the • Annualized % return: 15.51%* price of the underlying stock at the time the puts are sold, the investor may be faced with either buying back the short Rotes of return are calculated using a 50.03/share option commission puts at a loss or acquiring the underlying stock below the (subject to a $65 minimum) and a stock commission of $0.04/share (subject too $75 minimum) plus exchange fees current price, resulting in an unrealized loss. How does a cash-secured put strategy work? What is a cash-secured put writing strategy? An investor sells a put option, effectively giving someone else A cash-secured put is an options strategy designed to help an the right to sell to him or her the underlying security based on investor generate income and potentially build an equity portfolio the terms of the contact. The following shows a hypothetical over time. In this strategy, an investor sells put options on a stock example of this strategy in action: and deposits funds to cover the actual purchase of the security, AAPL stock is trading at $96.65, and a 15.lul'16 95.00 put option should it become necessary due to exercise. These funds are selling for $3.15 has 79 days until expiration. generally invested in short-term interest-bearing instruments for the duration of the option. In these instances, the investor may If an investor sells 10 contracts, he or she, as the "seller" of the be able to purchase a stock below its current market price.' options, would then collect the options premium of $315 per contract (standard option contracts cover 100 shares of stock), for a total of $3,150 in income. A put option is a contract that gives the buyer the right to sell an underlying stock at a specific price — the "strike" price — for a defined period of time. Merrill Lynch Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and Member SIPC, and other subsidiaries of Bank of America Corporation. Bank of America Corporation Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value EFTA00620125 Assuming the investor does not close out the position before expiration, there are three possible outcomes if the option Maximum loss potentialis equal to the strike price position is held to maturity.2 minus the premium initially received. The stock is flat or unchanged. Note: Since this strategy obligates the investor to buy stock The stock price increases. when the price falls below the strike, which occurs during The stock price declines below 95.00. market declines, investors employing the cash-secured put strategy should avoid selling more contracts than they are Examples of each scenario willing to own of the underlying stock. Scenario 1: The stock remains unchanged at $96.65 What are the benefits of a cash-secured put strategy? Since the stock is above the strike price of $95.00, the • Generates income. Investors receive up-front premiums from investor who bought the options would choose not to sell the sale of the options. the stock at $95.00 when he or she could sell it in the open • Takes advantage of market volatility. Since option premiums market for $96.65. Hence, the options would expire expand during periods of volatility when all else remains worthless, and the seller would keep the $3,150 for the 10 equal, the cash-secured seller brings in more income during contracts, less any commission or transaction costs. volatile times. Scenario 2: The stock increases from $96.65 • Establishes buying discipline. Since the cash-secured writer is Similarly to scenario 1, the investor who bought the options obligated to buy the stock should it expire below the strike would choose not to sell the stock at $95.00 when he or she price, the decision of whether or not to buy is made up front. could sell it in the open market for more. The seller would What are the risks associated with the cash-secured therefore keep the total premium of $3,150, less any put strategy? commission or transaction costs. • Downside exposure. Although cash-secured writers have less risk than the outright stock buyers, they do have downside Note: In this scenario, the seller of the put does not risk below the strike price, less the premium received for participate in the upside appreciation, but rather is limited selling the put. An investor must be willing to purchase to the initial premium received, in this case $3.15. underlying stock equal to the amount of shares in the written contracts. Maximum profit is realized with the stock price closing at or above the strike price and is equal to the initial • Limited upside. The maximum profit in a cash-secured put is premium received up front. equal to the initial amount received up front for selling the put. It does not increase if the price of the underlying stock Scenario 3: The stock price below to $95.00 rises. Since the stock is below the strike price of $95.00, the • Collateral. Although the collateral can earn interest, it is not investor would likely choose to exercise the option, requiring accessible to the investor until either the short options are the seller to purchase the underlying stock at a price of closed out or the option expires. $95.00. Since this outcome is possible, investors who sell The following graph illustrates the of the AAPL Cash- cash-secured puts should be comfortable with the risks of Secured put strategy. owning the underlying stock. The cost basis of each share is the strike price of $95.00, less the $3.15 in income that was received for the put, equaling Profit& Loss sees $91.85 per share, plus any commissions. The put position has a downside risk similar to that of a long stock position when 77 105 16 113 50)0 the price of the stock drops below the strike price by more than the premium. • 15000 Investors who believe that the underlying stock could decline 200)0 substantially during the term of the option would be better off using other options strategies to pursue their goals. Investing in options involves risk and may not be suitable for all investors. Certain A copy of the O0D accompanies this fact sheet. A copy is also available by requirements must be met to trade options through Merrill Lynch. Before buying contacting your financial advisor or by visiting the Options Gearing Corporation or selling an option, clients must receive a copy of the options disclosure document website at-, clicking "Publications" and selecting rharartArtstiesan4 Risks of Standardized CIALIAOS (O00). "Characteristics and Risks of Options." 2 Example is for illustrative purposes only and does not include exchange or SEC fees. Merrill Lynch is a registered trademark of Bank of America Corporation. Cl 2014 Bank of America Corporation. All rights reserved. I ARQMACSQ 421002PM-01314 EFTA00620126