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Friday, December 15, 2017

Established Covered Calls Position in Financial Select Sector SPDR Fund

A Covered Calls position has been established in the Financial Select Sector SPDR Fund (ticker XLF) at the $28.00 strike price and for the December 29th, 2017 options expiration date. Today, XLF went ex-distibution at $.1283 per share. Capturing this distribution is included in the potential financial results detailed below. In this case, a slightly out-of-the money strike price was chosen as the stocks of large banks and insurance companies, which are the predominant holdings in the XLF Fund, should benefit from the expected passage next week of the current tax bill.  

As detailed below, two potential return-on-investment results are:
  • +1.1% absolute return in 16 days (equivalent to a +25.3% annualized return-on-investment) if the price of XLF is unchanged upon the Dec 29th options expiration; OR
  • +1.8% absolute return in 16 days (equivalent to a +41.3% annualized return-on-investment) if the price of XLF rises to above the $28.00 strike price on the expiration date 


  • Financial Select Sector SPDR Fund (XLF) -- New Covered Calls Position
    The transactions were as follows:
    12/14/2017 Bought 1,000 shares of Financial Select Sector SPDR Fund shares @ $27.80 
    12/14/2017 Sold 10 XLF Dec 29th, 2017 $28.00 Call options @ $.18 per share
    Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of these Call options was 14.8 
    12/15/2017 Ex-Distribution of $128.30 = $.1283 per share x 1,000 shares

    Two possible overall performance result (including commissions) would be as follows:
    Covered Calls Cost Basis: $27,811.65
    = ($27.80 - $.18)* 1,000 shares + $11.65 commission

    Net Profit Components:
    (a) Options Income: +$180.00
    = ($.18* 1,000 shares)
    (b) Distribution Income: +$128.30
    = $.1283 per share * 1,000 shares 
    (c) Capital Appreciation (If XLF is unchanged at $27.80 purchase price at Dec 29th expiration): +$0.00
    = ($27.80 -$27.80)* 1,000 shares; OR
    (c) Capital Appreciation (If XLF is above $28.00 strike price at Dec 29th expiration): +$195.05
    = ($28.00 -$27.80)* 1,000 shares - $4.95 commission

    (a) Total Net Profit (If XLF price unchanged at $27.80 at expiration): +$308.30
    = (+$180.00 options income +$128.30 distribution income -$0.00 capital appreciation); OR
    (b) Total Net Profit (If XLF shares assigned at expiration): +$503.35
    = (+$180.00 options income +$128.30 distribution income +$195.05 capital appreciation)

    (a) Absolute Return (If XLF price unchanged at expiration): +1.1%
    = +$308.30/$27,811.65
    Equivalent Annualized Return: +25.3%
    = (+$308.30/$27,811.65)*(365/16 days); OR
    (b) Absolute Return (If XLF shares assigned at expiration): +1.8%
    = +$503.35/$27,811.65
    Equivalent Annualized Return: +41.3%
    = (+$503.35/$27,811.65)*(365/16 days)

    The downside 'breakeven price' at expiration is at $27.4917 ($27.80 price per share - $.18 options income - $.1283 distribution income), which is 1.1% below the current market price of $27.80.

    Thursday, December 14, 2017

    Early Assignment of Devon Energy Corp. Covered Calls

    Early this morning, the Covered Calls Advisor received notifications from my broker (Schwab) that three Devon Energy Corp. (ticker symbol DVN) December 15th, 2017 $36.00 Call options were exercised early, so 300 shares of Devon Energy stock in the Covered Calls Advisor Portfolio (CCAP) were assigned (i.e. sold) at the $36.00 strike price. 

    As you might recall, the Covered Calls Advisor Portfolio (CCAP) was short 5 Dec. 15th $36.00 Call options and was fully covered by 500 long shares of Devon stock.  So, three of the five Devon Covered Calls were exercised early by the owners of these Call options and the remaining 2 Covered Calls remain in the CCAP.  The possibility of some Dec 15th $36.00 Devon Call owners choosing to exercise early to capture the $.06 ex-dividend today while other owners didn't is not surprising.  There was only $0.05 per share [$2.11 midpoint of Call options' $2.03/$2.18 bid/ask price - ($38.06 current stock price - $36.00 strike price)] time value remaining in these Call options.  So some Call owners were willing to immediately forego the remaining $0.05 per share time value by exercising their option to buy the shares (in order to capture today's $0.06 per share ex-dividend).

    As detailed below, the actual return-on-investment result achieved for the three Devon Covered Calls that were assigned today was a +12.5% absolute return (equivalent to +22.7% annualized return) for the 202 days this position was held.  The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls position is established.  The two Devon Covered Calls remaining in the Covered Calls Advisor Portfolio will likely be assigned at their Dec 15th options expiration at market close tomorrow.


    Devon Energy Corp. (DVN) -- Covered Calls Position Closed by Early Assignment
    The transactions history was as follows:
    05/25/2017  Bought 500 Devon Energy Corp. shares @ $37.45
    05/25/2017 Sold 5 DVN June 16, 2017 $36.00 Call options @ $2.10
    Note: this was a simultaneous buy/write transaction.
    06/13/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
    06/16/2017 5 DVN June 16th, 2017 Call options expired
    Note: the price of DVN stock closed at $31.76 upon the June 16th options expiration date.
    07/03/2017 Sold 5 DVN July 21, 2017 $33.00 Call options @ $.87 per share
    07/21/2017 5 DVN Call options expired
    07/26/2017 Sold 5 DVN Aug 18, 2017 $35.00 Call options @ $.65 per share
    08/18/2017 5 DVN Call options expired
    Note: the price of DVN stock was $30.40 upon expiration of the Aug 18th Call options
    09/14/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
    09/14/2017 Sold 5 DVN October 20th, 2017 $35.00 Call options @ $.89 per share
    Note: the price of DVN stock was $34.12 today when the Oct 20th Call options were sold
    10/20/2017 5 DVN Call options expired
    Note: the price of DVN stock was $34.92 upon expiration of the Oct 20th Call options
    10/27/2017 Sold 5 DVN November 17th, 2017 $36.00 Call options @ $.93 per share
    Note: the price of DVN stock was $35.66 today when the Nov 17th Call options were sold
    11/17/2017 Bought-to-Close 5 DVN Nov 17th $36.00 Call options @ $2.73
    11/17/2017 Sold-to-Open 5 DVN Dec 15th, 2017 $36.00 Call options @ $3.14
    12/14/2017 Three DVN Call options exercised early (day prior to ex-dividend date); so stock assigned (sold) at $36.00 strike price.
    Note: the closing price of Devon stock was $38.06 when these Calls were exercised

    The overall performance result (including commissions) was as follows:
    Cost Basis of Original Covered Calls Position Established in DVN: $10,607.97
    = ($37.45 - $2.10)*300 + (3/5) * $4.95 commission

    Net Profit Components:
    (a) Options Income: +$1,734.90
    = ($2.10 + $.87 + $.65 + $.89 +$.93 -$2.73 +$3.14) *300 shares - 6*$3.35 commissions
    (b) Dividend Income: +$36.00
    = ($.06 + $.06) * 300 shares
    (c) Capital Appreciation: -$439.95
    = ($36.00-$37.45)*300 shares - $4.95 commissions

    Total Net Profit: +$1,330.95
    = (+$1,734.90 options income +$36.00 dividends -$439.95 capital appreciation)

    Absolute Return: +12.5%
    = +$1,330.95/$10,607.97
    Annualized Return: +22.7%
    = (+$1,330.95/$10,607.97)*(365/202 days)

    Wednesday, December 13, 2017

    Overall Market Meter Remains 'Neutral'

    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 unchanged at Neutral.  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 3.14 (see blue line at the bottom of the chart above) is in the Neutral range (Note: the Neutral range is from 3.10 to 3.59).  As shown in the right sidebar, the Covered Calls investing strategy corresponding to this overall Neutral sentiment is to "on-average sell 1% out-of-the-money Covered Calls for the next options expiration month".

    The Macroeconomic and Momentum factors are Bullish, the Value factors are Very Bearish, and the Growth factor is Neutral.  Please take special notice that both Value indicators (P/E Ratios and also Total Market Index to GDP) are Very Bearish:
    • The current P/E ratio for the S&P 500 (based on the average of the actual 'Operating' and 'As Reported' earnings for the past year) is very high at 23.6.  This is higher than the expected current P/E ratio of 18.6 (based on the current 2.0% CPI-U inflation rate for the past year).  The market would have to decline by 21.2% from its current level to reach a current expected average P/E ratio of 18.6.  
    • As the chart below clearly demonstrates, only once since 1970 has the Wilshire 5000 to GDP (aka Buffett Indicator) been at a higher level than it is currently.    
    This very high current market valuation explains why the Covered Calls Advisor Portfolio is now establishing only conservative in-the-money positions.

    Finally, in February this year, the Covered Calls Advisor posted an article about the 'Emotional Roller Coaster of Investing' (Link to Article) which posited that we were in the 'Exhiliration' stage and furthermore that passing a Tax Reform bill might be the final step that would transition investors further into the 'Euphoria' stage. Such a bill could become law within the next month. That might result in yet another short-term all-time high in the stock market.  But when it comes to investing, the Covered Calls Advisor now advises 'extreme caution' since (as the 'Emotional Roller Coaster of Investing graph shows) euphoria is normally followed by declines in investors' sentiment which are accompanied by stock market declines.
    Do you agree?  Disagree?  Why?

    To share your comments or questions regarding this post (or the details related to any of the seven factors used in this Overall Market Meter model), please click on the Comments link below or email me at the address shown in the upper-right sidebar.

    Regards and Godspeed,
    Jeff