Thursday, March 23, 2017

Established Covered Calls Position in JPMorgan Chase & Co.

Today, a covered calls positions were established in JPMorgan Chase & Co. (ticker symbol JPM) with an Apr2017 expiration and at the $85.00 strike price.  This position has an upcoming quarterly ex-dividend on April 4th of $.50 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the April 21st options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is +1.1% absolute return (equivalent to +32.0% annualized return for the next 12 days) if the stock is assigned early (business day prior to April 4th ex-date); OR +1.6% absolute return (equivalent to +19.8% annualized return over the next 30 days) if the stock is assigned on the April 21, 2017 options expiration date.


JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend occurs on Apr 4th for $.50.  Although very unlikely, if the current time value (i.e. extrinsic value) of $.95 [$3.16 option premium - ($87.21 stock price - $85.00 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by April 3rd (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 400 JPM shares away to capture the dividend payment.


The transactions were:
03/23/2017 Bought 400 JPM shares @ $87.21
03/23/2017 Sold 4 JPM Apr2017 $85.00 Call options @ $3.16
Note: a simultaneous buy/write transaction was executed.
04/04/2017 Upcoming quarterly ex-dividend of $.50 per share

Two possible overall performance results (including commissions) for this JPM covered calls position are as follows:
Stock Purchase Cost: $34,888.95
= ($87.21*400+$4.95 commission)

Net Profit:
(a) Options Income: +$1,256.45
= ($3.16*400 shares) - $7.55 commissions
(b) Dividend Income (If option exercised early on business day prior to April 4th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Apr2017 expiration): +$200.00
= ($.50 dividend per share x 400 shares)
(c) Capital Appreciation (If JPM assigned early on April 3rd): -$888.95
+($85.00-$87.21)*400 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $55.00 at Jul2016 expiration): -$888.95
+($85.00-$87.21)*400 - $4.95 commissions

1. Total Net Profit (If option exercised on day prior to April 4th ex-dividend date): +$367.50
= (+$1,256.45 +$0.00 -$888.95); or
2. Total Net Profit (If JPM assigned at $85.00 at Apr2017 expiration): +$567.50
= (+$1,256.45 +$200.00 -$888.95)

1. Absolute Return [If option exercised on April 3rd (business day prior to ex-dividend date)]: +1.1%
= +$367.50/$34,888.95
Annualized Return (If option exercised early): +32.0%
= (+$367.50/$34,888.95)*(365/12 days); or
2. Absolute Return (If JPM assigned at $85.00 at Apr2017 expiration): +1.6%
= +$567.50/$34,888.95
Annualized Return: +19.8%
= (+$567.50/$34,888.95)*(365/30 days)

Either outcome provides a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $85.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $83.55 ($87.21 -$3.16 -$.50) provides 4.2% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, nine of the eleven criteria are achieved for this JPMorgan position.


Established New Position in Hawaiian Holdings Inc.

Today, a new position was established in Hawaiian Holdings Inc.(ticker HA) by selling five April 2017 100% cash-secured Put options at the $45.00 strike price.  The short Puts were chosen instead of the comparable covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, there is potential for a +2.3% absolute return in 30 days (equivalent to a +27.9% annualized return-on-investment).

Hawaiian Holdings Inc. (HA) -- New 100% Cash-Secured Puts Position
This position was established when the price of Hawaiian Holdings was $46.88 (4.0% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 30.2 when this position was established; so the $1.05 price received per share received when the Puts were sold is a nice premium to receive for these 4.0% out-of-the-money Put options.    

The transaction was as follows:
03/23/2017  Sold 5 HA Apr2017 $45.00 100% cash-secured Put options @ $1.05
Note: the price of HA was $46.88 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 five Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $22,500.00
= $45.00*500
Note: the price of HA was $46.88 when these options were sold

Net Profit:
(a) Options Income: +$516.80
= ($1.05*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HA is above $45.00 strike price at Apr2017 expiration): +$0.00
= ($45.00-$45.00)*500 shares

Total Net Profit (If Hawaiian Holdings stock price is above $45.00 strike price at Apr2017 options expiration): +$516.80
= (+$516.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HA is above $45.00 strike price at Apr2017 options expiration): +2.3%
= +$516.80/$22,500.00
Annualized Return: +27.9%
= (+$516.80/$22,500.00)*(365/30 days)

The downside 'breakeven price' at expiration is at $43.95 ($45.00 - $1.05), which is 6.25% below the current market price of $46.88.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Apr 21st, 2017 options expiration) for this Hawaiian Holdings short Puts position is 67.6%. This compares with a probability of profit of 50.3% for a buy-and-hold of HA shares over the same time period. Using this probability of profit of 67.6%, the expected value annualized return-on-investment (if held until expiration) is +18.9% (+27.9% * 67.6%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $47.93 ($46.88 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold HA stock until the April 21, 2017 options expiration date rather than selling these Put options.

Closed Short Puts Position in in iPath S&P 500 VIX Short-Term Futures ETN

Today, the Covered Calls Advisor closed out the 100% cash-secured short Puts position in in iPath S&P 500 VIX Short-Term Futures ETN (ticker symbol VXX).  Although this trade was profitable, the Covered Calls Advisor is very unlikely to establish another position in VXX in the future.  I expected a better return-on-investment than was achieved given the significant increase in volatility in the S&P 500 Volatility Index (VIX) from 11.33 when the position was established to 12.94 today when the position was closed.  But because of these VXX futures are so short-term in nature, their inherent value decline makes it exceedingly difficult to profit from them.

Fortunately in this position, the Covered Calls Advisor achieved a +0.6% absolute return-on-investment (equivalent to a +13.9% annualized return-on-investment) for the 15 days the  position was held.  Details of the transactions and results are provided below.


iPath S&P 500 VIX Short-Term Futures ETN (VXX) -- Position Closed
The transactions were as follows:
03/08/2017 Sold 10 VXX March 24, 2017 $17.00 100% cash-secured Put options @ $.69
Note: the price of VXX was $17.02 when these Puts were sold
03/23/2017 Bought-to-Close 10 VXX Puts @ $.57
Note: the price of VXX was $16.63 when this transaction occurred

The performance result (including commissions) for this iPath S&P 500 VIX Short-Term Futures ETN position is as follows:
VXX Cost Basis: $17,000.00
= $17.00*1,000 shares

Net Profit:
(a) Options Income: +$97.10
= ($.69 - $.57) *1,000 shares - 2* $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
=+($17.00-$17.00)*1,000 shares

Total Net Profit: +$97.10
= (+$97.10 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +0.6%
= +$97.10/$17,000.00
Annualized Return: +13.9%
= (+$97.10/$17,000.00)*(365/15 days)

Tuesday, March 21, 2017

Early Assignment of Las Vegas Sands Corp Covered Calls

Today, Las Vegas Sands Corp (ticker symbol LVS) is ex-dividend at $.73 per share.  The Covered Calls Advisor owned a LVS April 2017 covered calls position at the $50.00 strike price.  Early this morning (as expected), I received email and text notifications from my broker (Schwab) that the 5 LVS Call options were exercised early, so the 500 shares of LVS stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $50.00 strike price.

Details of the transactions and results for this Las Vegas Sands position are provided below.  The shares had risen from $55.35 when the position was originally established (on January 23rd) to $56.63 at yesterday's market close.  The time value remaining in the Call options was $0.75 (based on the $7.38 midpoint of the $7.05/$7.70 bid/ask spread at the market close yesterday), so I was somewhat surprised that the Call owners would immediately forfeit the $.75 per share to buy the shares to capture the dividend; but it yielded a good return-on-investment result.    

The actual return-on-investment result for this Las Vegas Sands position was a +2.6% absolute return (equivalent to +17.0% annualized return) for the 56 days holding period.  Details of the transactions and associated return-on-investment results are shown below.


Las Vegas Sands Corp (LVS) -- Position Closed
The transactions are as follows:
01/23/2017 Sold 5 LVS Feb2017 $52.50 Puts @ $.78
Note: The price of LVS was $55.35 when this transaction was executed.
02/17/2017 5 Put options assigned and 500 shares of LVS purchased at the $52.50 strike price.
Note: the price of LVS was $52.03 at market close at Feb2017 options expiration
02/21/2017 Sold 5 LVS Apr2017 $50.00 Call options @ $3.10
Note: the price of LVS was $52.14 when these Call options were sold
03/20/2017 Owner of Calls exercised their option and 500 shares were assigned at $50.00 strike price

The performance result (including commissions) for this transaction was as follows:
100% Cash-Secured Cost Basis: $26,256.95
= $52.50*500 - $6.95 commission

Net Profit:
(a) Options Income: +$1,931.80
= ($.78 + $3.10) *500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00

(c) Capital Appreciation: -$1,245.05
= ($50.00-$52.50)*500 shares - $4.95 commission

Total Net Profit: +$686.75
= (+$1,931.80 +$0.00 -$1,245.05)

Absolute Return-on-Investment: +2.6%
= +$686.75/$26,256.95
Annualized Return: +17.0%
= (+$686.75/$26,256.95)*(365/56 days)