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Monday, November 19, 2018

Covered Calls Established in Bank of America Corp.

Today, a Covered Calls position was established in Bank of America Corp. (ticker BAC) for the December 21st, 2018 expiration and at the $27.00 strike price when the stock was at $27.67.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Slightly Bearish, a relatively conservative slightly in-the-money position was established.

There is an upcoming ex-dividend of $.15 on December 6th which is included in the analysis below.  This investment is very similar to the Citigroup investment last month using a dividend capture strategy.  It seems that interest rates have bottomed and have now begun an increasing trajectory which will continue to benefit bank earnings.  Selling in-the-money or near-the-money monthly Covered Calls using this dividend capture strategy for one of the four biggest U.S. money center banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) each month (JPMorgan for Jan, Apr, July, and Oct options expirations; Citigroup and/or Wells Fargo for Feb, May, Aug, and Nov expirations; and Bank of America for Mar, Jun, Sep, and Dec expirations) should result in approximately a +4.0% higher annualized return than would be achieved with Covered Calls in these same stocks during non-ex-dividend months.    

As detailed below, a potential outcome for this investment is +2.7% absolute return-on-investment for the next 33 days (equivalent to +29.9% on an annualized return basis) if Bank of America stock closes above the $67.00 strike price on the Dec. 21st options expiration date.


Bank of America Corp. (BAC) -- New Covered Calls Position
The transactions were:
11/19/2018 Bought 1,000 shares of Bank of America stock @ $27.67 per share 
11/19/2018 Sold 10 BAC Dec 21st, 2018 $27.00 Call options @ $1.24 per share
Note: The Open Interest in these Calls was a very liquid 18,507 contracts and the Implied Volatility was 28.4 (very attractive) considering the relative predictability of BofA's financials.
12/06/2018 Upcoming ex-dividend of $.15 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $26,441.65
= ($27.67 - $1.24)* 1,000 shares + $11.65 commission

Net Profit Components:
(a) Options Income: +$1,240.00
= ($1.24* 1,000 shares)
(b) Dividend Income: +$150.00
= $.15 per share * 1,000 shares 
(c) Capital Appreciation (If Bank of America stock is above $27.00 strike price at Dec 21st expiration): -$674.95
= ($27.00 -$27.67)* 1,000 shares - $4.95 commission

Potential Total Net Profit (If BAC stock assigned at expiration): +$715.05
= (+$1,240.00 options income +$150.00 dividend income -$674.95 capital appreciation)

Absolute Return: +2.7%
= +$715.05/$26,441.65
Equivalent Annualized Return: +29.9%
= (+$715.05/$26,441.65)*(365/33 days)

The downside 'breakeven price' at expiration is at $26.28 ($27.67 - $1.24 - $.15), which is 5.0% below the current market price of $27.67.  This is good downside protection given the attractive potential +29.9% annualized ROI for this investment.

Closed Postion in Citigroup Inc.

Last Friday, the November 16th, 2018 Covered Calls position in Citigroup Inc. (ticker symbol C) expired with the stock price at $64.95, below the $65.00 strike price -- so the Call options expired and the 500 shares were retained in the Covered Calls Advisor's Portfolio.  The stock moved higher today and the position was closed out by selling the 500 shares at $65.22.

This position demonstrates the trifecta that can sometimes be achieved using a Covered Calls dividend capture strategy with profits being obtained from all three sources: (1) Call options income; (2) Dividend income; and (3) Capital Appreciation of the underlying stock. 

As detailed below, this Citigroup Inc. position achieved a return-on-investment result of +4.3% absolute return in 20 days (equivalent to a +78.2% annualized return-on-investment).


Citigroup Inc. (C) -- Covered Calls Position Closed
The transactions were as follows:
10/30/2018 Bought 500 shares of Citigroup Inc. stock @ $64.48 per share 
10/30/2018 Sold 5 Citi Nov 16th, 2018 $65.00 Call options @ $1.52 per share
Note: this was a simultaneous Buy/Write transaction
11/02/2018 Ex-dividend of $225.00 = 500 shares x $.45 per share
11/16/2018 Call options expired with closing stock price of $64.95 below the $65.00 strike price
11/19/2018 Sold 500 shares Citi stock at $65.22

The overall performance result (including commissions) is as follows:
Covered Calls Cost Basis: $31,488.30
= ($64.48 - $1.52)* 500 shares + $8.30 commissions

Net Profit Components:
(a) Options Income: +$760.00
= ($1.52 * 500 shares)
(b) Dividend Income: +$225.00
 = $.45 per share x 500 shares 
(c) Capital Appreciation: +$365.05
= ($65.22 -$64.48)* 500 shares - $4.95 commission

Total Profit: +$1,350.05
=$760.00 options income + $225.00 dividend income + $365.05 capital appreciation

Absolute Return-On-Investment: +4.3%
= +$1,350.05/$31,488.30
Equivalent Annualized Return: +78.2%
= (+$1,350.05/$31,488.30)*(365/20 days)

Saturday, November 17, 2018

November 16th, 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had four positions [Alibaba Group Holding Ltd.(2 positions), Alphabet Inc., and Citigroup Inc.] with November 16th, 2018 options expirations.  Each of these Covered Calls positions closed with their stock prices below the strike prices, so their respective Call options expired and their underlying shares remain in the Covered Calls Advisor Portfolio.  Decisions will be made for each position to either: (1) Sell Call options against the long stock position to re-establish another Covered Calls position at the December 21, 2018 options expiration date; or (2) Sell the stock to close out the position.  As always, all transactions will be posted on this blog on the same day they occur. 
So far in 2018, thirty-eight of forty-four (86.4%) positions have been closed at a profit.  This far exceeds the Covered Calls Advisor's overall long-term goal of having at least two-thirds (67%) of positions closed out at a profit.  None of the remaining six positions [Alibaba Group Holding Ltd. (two positions), Alphabet Inc., Citigroup Inc., Lam Research Inc., and U.S. Steel Corp.] have yet to be closed out, but instead are currently held as open long stock positions in the Covered Calls Advisor Portfolio.   

For the thirty-eight positions closed out so far in 2018, the average annualized return-on-investment is +28.8%.  In comparison, the annualized return-on-investment so far in 2018 for the S&P 500 benchmark is +4.5%.