Thursday, February 4, 2016

Established Covered Calls Position in Delta Air Lines Inc.

Today, a covered calls position was established in Delta Air Lines Inc. (ticker symbol DAL) with a Feb2016 expiration.  This position includes consideration of an upcoming $.135 quarterly dividend with an ex-div date of Feb 12th.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established with the strike price of $41.00 below the stock purchase price of $43.46.

As detailed below, two potential return-on-investment results for this position are:
If Early Assignment: +0.9% absolute return (equivalent to +42.3% annualized return for the next 8 days) if the stock is assigned early (business day prior to Feb 12 ex-date); OR
If Dividend Capture: +1.2% absolute return (equivalent to +28.2% annualized return over the next 16 days) if the stock is assigned at the Feb2016 expiration on February 19th.

1. Delta Air Lines Inc. (DAL) -- New Covered Calls Position
The $.135 dividend of Dec 12th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.45 [$2.91 option premium - ($43.46 stock price - $41.00 strike price)] remaining in the short call option decays substantially by February 11th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Delta Air Lines shares away to capture the dividend.

The transactions were:
02/04/2016 Bought 400 Delta Air Lines shares @ $43.46
02/04/2016 Sold 4 DAL Feb2016 $41.00 Call options @ $2.91
Note: a simultaneous buy/write transaction was executed.
02/12/2016 Upcoming dividend of $.135 per share

Two possible overall performance results (including commissions) for this Delta Air Lines covered calls position are as follows:
Stock Purchase Cost: $17,391.95
= ($43.46*400+$7.95 commission)

Net Profit:
(a) Options Income: +$1,153.05
= ($2.91*400 shares) - $10.95 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 12th ex-dividend date): +$0.00; or
(b) Dividend Income (If DAL assigned at Feb2016 expiration): +$54.00
= ($.135 dividend per share x 400 shares)
(c) Capital Appreciation (If DAL assigned early on Feb 11th): -$991.95
+($41.00-$43.46)*400 - $7.95 commissions; or
(c) Capital Appreciation (If DAL assigned at $41.00 at Feb2016 expiration): -$991.95
+($41.00-$43.46)*400 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 12 ex-div date): +$161.10
= (+$1,153.05 +$0.00 -$991.95); or
Total Net Profit (If PCAR assigned at $45.00 at Jan2016 expiration): +$215.10
= (+$1,153.05 +$54.00 -$991.95)

1. Absolute Return [If option exercised on Feb 11th (business day prior to ex-dividend date)]: +0.9%
= +$161.10/$17,391.95
Annualized Return (If option exercised early): +42.3%
= (+$161.10/$17,391.95)*(365/8 days); OR

2. Absolute Return (If DAL assigned at $41.00 at Feb2016 expiration): +1.2%
= +$215.10/$17,391.95
Annualized Return: +28.2%
= (+$215.10/$17,391.95)*(365/16 days)

Either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $41.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $40.55 ($43.46 -$2.91) provides 6.7% downside protection below today's purchase price.

Tuesday, February 2, 2016

Overall Market Meter Remains "Slightly Bearish"

Today, the Covered Calls Advisor recalculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The result is that the Covered Calls Advisor's current market viewpoint remains at Slightly Bearish.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.    

The seven factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).
Note: The rating for each of these factors is not subjective.  Each factor is calculated using objective, quantifiable measures.



The current Market Meter average of 2.57 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 2.25 to 2.99).  This overall value of 2.57 is slightly less than the 2.71 value when the prior rating was done last November, but it is still within the 'Slightly Bearish' range. 

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bearish sentiment is to "on-average sell 1% in-the-money covered calls for the next options expiration month".

Your comments or questions regarding this post (or the details related to any of the seven factors used in this model) are welcomed. Please email me at the address shown in the upper-right sidebar.

Regards and Godspeed,
Jeff

Monday, February 1, 2016

Established Positions in Capital One Financial Corp. and Energy Select Sector SPDR Fund ETF

Today, positions were established in Capital One Financial Corp.(ticker symbol COF) and the Energy Select Sector SPDR Fund ETF (ticker XLE).  Capital One is a covered calls position with a Feb2016 expiration that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.40 expected on Feb11th.  For XLE, two March 2016 100% cash-secured Put options were sold (in lieu of a comparable covered calls position) since the implied volatility of the Puts exceeded that of the Calls (thus providing a higher potential return-on-investment result).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for both positions (with the strike prices below the stock prices when the positions were established).

As detailed below, the potential returns are:
1. Capital One Financial Corp: +1.5% absolute return in 19 days (equivalent to a +29.1% annualized return-on-investment)
2. Energy Select Sector SPDR Fund ETF: +3.9% absolute return in 47 days (equivalent to a +30.5% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 25 for Capital One and 36 for the Energy Select Sector SPDR Fund ETF, so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.  


1. Capital One Financial Corp (COF) -- New Covered Call Position
A quarterly dividend is expected on Feb 11th.  The amount has not yet been declared, but a regular $.40 dividend is expected and is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.67 [$3.00 option premium - ($64.83 stock price - $62.50 strike price)] remaining in the short call options decay substantially below the $.40 dividend amount by February 10th (the business day prior to the ex-dividend date), then there is a possibility that the Call options owner would exercise early and therefore call the 200 COF shares away to capture the dividend payment.

As shown below, two potential return-on-investment results for this position are:
If Early Assignment: +0.9% absolute return (equivalent to +32.8% annualized return for the next 10 days) if the stock is assigned early (business day prior to Feb 11 ex date); OR
If Dividend Capture: +1.5% absolute return (equivalent to +29.1% annualized return over the next 19 days) if the stock is assigned at the Feb2016 expiration on February 19th.

The transactions were:
02/01/2016 Bought 200 COF shares @ $64.83
02/01/2016 Sold 2 COF Feb2016 $62.50 Call options @ $3.00
Note: a simultaneous buy/write transaction was executed.
02/11/2016 Upcoming ex-dividend of $.40 per share

Two possible overall performance results (including commissions) for this COF covered calls position are as follows:
Stock Purchase Cost: $12,973.95
= ($64.83*200+$7.95 commission)

Net Profit:
(a) Options Income: +$590.55
= ($3.00*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 11th ex-div date): +$0.00; or
(b) Dividend Income (If COF assigned at Feb2016 expiration): +$80.00
= ($.40 dividend per share x 200 shares)
(c) Capital Appreciation (If COF assigned early on Feb 10th): -$473.95
+($62.50-$64.83)*200 - $7.95 commissions; or
(c) Capital Appreciation (If COF assigned at $62.50 at Feb2016 expiration): -$473.95
+($62.50-$64.83)*200 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Feb 11th ex-dividend date): +$116.60
= (+$590.55 +$0.00 -$473.95); or
Total Net Profit (If COF assigned at $62.50 at Feb2016 expiration): +$196.60
= (+$590.55 +$80.00 -$473.95)

1. Absolute Return [If option exercised on Feb 10th (business day prior to ex-dividend date)]: +0.9%
= +$116.60/$12,973.95
Annualized Return (If option exercised early): +32.8%
= (+$116.60/$12,973.95)*(365/10 days); OR

2. Absolute Return (If COF assigned at $62.50 at Feb2016 expiration): +1.5%
= +$196.60/$12,973.95
Annualized Return: +29.1%
= (+$196.60/$12,973.95)*(365/19 days)

In this instance, early assignment provides a slightly annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $61.83 ($64.83 -$3.00) provides a substantial 4.6% downside protection below today's purchase price.


2. Energy Select Sector SPDR Fund ETF (XLE) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
02/01/2016  Sold 2 XLE Mar2016 $55.00 100% cash-secured Put options @ $2.21
Note: the price of XLE was $56.78 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 Put options sold.


A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $11,000.00
= $55.00*200
Note: the price of XLE was $56.78 when these options were sold

Net Profit:
(a) Options Income: +$432.55
= ($2.21*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If XLE is above $55.00 strike price at Mar2016 expiration): +$0.00
= ($55.00-$55.00)*200 shares

Total Net Profit (If XLE is above $55.00 strike price at Mar2016 options expiration): +$432.55
= (+$432.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If XLE is above $55.00 strike price at Mar2016 options expiration): +3.9%
= +$432.55/$11,000.00
Annualized Return: +30.5%
= (+$432.55/$11,000.00)*(365/47 days)

The downside 'breakeven price' at expiration is at $52.79 ($55.00 - $2.21), which is 7.0% below the current market price of $56.78.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 18th, 2016 options expiration) for this XLE short Puts position is 61%. This compares with a probability of profit of 50.3% for a buy-and-hold of XLE shares over the same time period. Using this probability of profit of 61%, the expected value annualized return-on-investment (if held until expiration) is +18.6% (+30.5% * 61%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $58.99 ($56.78 + $2.21).  This is the price above which it would have been more profitable to simply buy-and-hold XLE until the Mar2016 options expiration date rather than selling these Put options.

Saturday, January 30, 2016

Returns for January 2016

As shown in the chart below, the Covered Calls Advisor Portfolio (CCAP) outperformed the benchmark Russell 3000 Index by 1.97 percentage points for January 2016.  In a month when the Russell 3000 declined by 5.72%, the CCAP declined by 3.75%.  









The primary factors contributing to this outperformance were:             
1.  Established conservative in-the-money covered calls which provided greater downside protection in the down market during January; and 
2. Maintained an abnormally high cash balance average of about 40% in the portfolio during January.

As a reminder, the Covered Calls Advisor Portfolio is not identical to the advisor's personal portfolio. However, it does provide a comparable overall portfolio return result since all equities in the CCAP are also held in this advisor's personal portfolio. To ensure comparability, all transaction dates and transaction prices herein are identical to those that were established in the Covered Calls Advisor's personal portfolio. The primary difference between the two accounts is the total number of shares held for each equity. This approach is used to preserve the confidentiality of the total value of the Covered Call Advisor's personal portfolio.

The Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. Here's an example to aid understanding of how the overall portfolio performance is determined: 
If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100Of course, the actual 'Total Account Value Return Percent' shown also includes the value of any deposits and withdrawals made each month.

If you have any comments or questions, please email me at the address shown in the right sidebar of this blog site.

Regards and Godspeed,
Jeff