Friday, July 1, 2016

Early Assignment of JPMorgan Chase Covered Calls

The Covered Calls Advisor had a JPMorgan Chase & Co. (ticker JPM) July 2016 covered calls position at the $55 strike price.  Early this morning, I received an email notification from my broker (Schwab) that the 5 JPM Call options were exercised early, so the 500 shares of JPM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $55 strike price.

Details for this JPMorgan covered calls position are provided below.  The JPM shares had risen from $58.14 when purchased (only 4 days ago) to $61.66 at yesterday's market close.  The time value remaining in the Call options had declined to approximately $.44 (based on the midpoint of the $6.95/$7.25 bid/ask spread at the market close yesterday).  Given that the stock price declines at market open today by the $.48 ex-div amount, I was somewhat surprised that the owner of the Call options exercised his/her option early since they immediately forfeited the remaining $.44 time value to purchase the shares (and capture the dividend).  In this advisor's experience, early assignment normally occurs only in those uncommon deep-in-the-money positions when there is less than $.15 time value remaining near the end of trading on the day prior to the ex-div date.  But as covered calls investors, we are grateful to receive the immediate gift ($.44 per share in this instance) when it does occur. 

As detailed below, the actual return-on-investment result for this closed position was a +1.2% absolute return (equivalent to +106.2% annualized return for the 4 days holding period).


The transactions were:
06/27/2016 Bought 500 JPM shares @ $58.14
06/27/2016 Sold 5 JPM Jul2016 $55.00 Call options @ $3.84
Note: a simultaneous buy/write transaction was executed.
07/01/2016 Upcoming quarterly ex-dividend of $.48 per share
07/01/2016 5 JPM Call options assigned and associated 500 JPM shares sold at $55.00 strike price.  Note: the price of JPM stock was $61.66 at yesterday's market close.

The overall performance result (including commissions) for this JPMorgan covered calls position was as follows:
Stock Purchase Cost: $29,077.95
= ($58.14*500+$7.95 commission)

Net Profit:
(a) Options Income: +$1,916.25
= ($3.84*500 shares) - $3.75 commissions
(b) Dividend Income (Call options exercised early on business day prior to July 1st ex-div date): +$0.00
(c) Capital Appreciation (Early assignment on June 30th): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions

Total Net Profit (Call options exercised on day prior to Jul 1st ex-dividend date): +$338.30
= (+$1,916.25 options income +$0.00 dividend income -$1,577.95 capital appreciation)

Absolute Return: +1.2%
= +$338.30/$29,077.95
Annualized Return (Call options were exercised early): +106.2%
= (+$338.30/$29,077.95)*(365/4 days)

The cash now available from the closing of this JPMorgan Chase covered calls position will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.  Any new positions will be posted on this site on the same day they occur.

Tuesday, June 28, 2016

Established Four New Positions

Yesterday, positions were established in Alphabet Inc.(ticker symbol GOOGL), Home Depot Inc.(HD), JPMorgan Chase & Co.(JPM), and S&P 500 ETF (SPY).

The Covered Calls Advisor Portfolio (CCAP) has been idle (100% cash) since April 18th, when the S&P 500 (SPY) closed at 209.24.  With SPY having declined by 4% since then (largely as a result of last week's Brexit vote), the implied volatility of options has moved substantially higher and selling options offers an attractive return-on-investment opportunity.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for each of the four positions (with the strike prices below the stock prices).  The CCAP is now about 25% invested and 75% cash.

For the Alphabet, Home Depot, and S&P 500 positions, July2016 100% cash-secured Put options were sold (instead of establishing comparable covered calls positions) since the implied volatility of the Puts exceeded that of the Calls (thus providing a slightly higher potential return-on-investment result).  JPMorgan Chase is a covered calls position that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.48 on July 1st. 

As detailed below, the potential returns are:
1. Alphabet Inc.: +1.5% absolute return in 19 days (equivalent to a +28.3% annualized return-on-investment)
2. Home Depot Inc.: +0.8% absolute return in 19 days (equivalent to a +16.3% annualized return-on-investment)
3. JPMorgan Chase & Co.: +2.0% absolute return in 19 days (equivalent to a +37.7% annualized return-on-investment)
4. S&P 500 ETF: +0.9% absolute return in 19 days (equivalent to a +19.8% annualized return-on-investment)
Note: in each case, the Implied Volatility (IV) of the options at the time they were sold 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. Alphabet Inc. (GOOGL) -- New 100% Cash-Secured Puts Position 
The transaction was as follows:
06/27/2016  Sold 1 GOOGL Jul2016 $665.00 100% cash-secured Put option @ $9.90
Note: the price of GOOGL was $679.87 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 option sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $66,500.00
= $665.00*100

Net Profit:
(a) Options Income: +$981.30
= ($9.90*100 shares) - $8.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GOOGL is above $665.00 strike price at Jul2016 expiration): +$0.00
= ($665.00-$665.00)*100 shares

Total Net Profit (If GOOGL is above $665.00 strike price at Jul2016 options expiration): +$981.30
= (+$981.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If GOOGL is above $665.00 strike price at Jul2016 options expiration): +1.5%
= +$981.30/$66,500.00
Annualized Return: +28.3%
= (+$981.30/$66,500.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $655.10 ($665.00 - $9.90), which is 3.6% below the current market price of $679.87.
The 'crossover price' at expiration is $689.77 ($679.87 + $9.90).  This is the price above which it would have been more profitable to buy-and-hold GOOGL until the Jul2016 options expiration date rather than selling these Put options.


2. Home Depot Inc. (HD) -- New 100% Cash-Secured Puts Position 
The transaction was as follows:
06/27/2016  Sold 3 HD Jul2016 $120.00 100% cash-secured Put options @ $1.05
Note: the price of HD was $125.09 today when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $36,000.00
= $120.00*300

Net Profit:
(a) Options Income: +$304.80
= ($1.05*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HD is above $120.00 strike price at Jul2016 expiration): +$0.00
= ($120.00-$120.00)*300 shares

Total Net Profit (If HD is above $120.00 strike price at Jul2016 options expiration): +$304.80
= (+$304.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HD is above $120.00 strike price at Jul2016 options expiration): +0.8%
= +$304.80/$36,000.00
Annualized Return: +16.3%
= (+$304.80/$36,000.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $118.95 ($120.00 - $1.05), which is 4.9% below the current market price of $125.09.
The 'crossover price' at expiration is $126.14 ($125.09 + $1.05).  This is the price above which it would have been more profitable to buy-and-hold HD until the Jul2016 options expiration date rather than selling these Put options.


3. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend occurs on July 1st for $.48.  Although very unlikely, if the current time value (i.e. extrinsic value) of $.70 [$3.84 option premium - ($58.14 stock price - $55.00 strike price)] remaining in the short call options decay further by June 31st (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 500 JPM shares away to capture the dividend payment.

As shown below, two potential return-on-investment results for this position are:
If Early Assignment: +1.1% absolute return (equivalent to +69.1% annualized return for the next 6 days) if the stock is assigned early (business day prior to July 1st ex date); OR
If Dividend Capture: +2.0% absolute return (equivalent to +37.7% annualized return over the next 19 days) if the stock is assigned at the Jul2016 expiration on July 15th.

The transactions were:
06/27/2016 Bought 500 JPM shares @ $58.14
06/27/2016 Sold 5 JPM Jul2016 $55.00 Call options @ $3.84
Note: a simultaneous buy/write transaction was executed.
07/01/2016 Upcoming quarterly ex-dividend of $.48 per share

Two possible overall performance results (including commissions) for this JPM covered calls position are as follows:
Stock Purchase Cost: $29,077.95
= ($58.14*500+$7.95 commission)

Net Profit:
(a) Options Income: +$1,908.30
= ($3.84*500 shares) - $11.70 commissions
(b) Dividend Income (If option exercised early on business day prior to July 1st ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Jul2016 expiration): +$240.00
= ($.48 dividend per share x 500 shares)
(c) Capital Appreciation (If JPM assigned early on June 31st): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $55.00 at Jul2016 expiration): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions

Total Net Profit (If option exercised on day prior to July 1st ex-dividend date): +$330.35
= (+$1,908.30 +$0.00 -$1,577.95); or
Total Net Profit (If JPM assigned at $55.00 at Jul2016 expiration): +$570.35
= (+$1,908.30 +$240.00 -$1,577.95)

1. Absolute Return [If option exercised on June 31st (business day prior to ex-dividend date)]: +1.1%
= +$330.35/$29,077.95
Annualized Return (If option exercised early): +69.1%
= (+$330.35/$29,077.95)*(365/6 days); OR

2. Absolute Return (If JPM assigned at $55.00 at Jul2016 expiration): +2.0%
= +$570.35/$29,077.95
Annualized Return: +37.7%
= (+$570.35/$29,077.95)*(365/19 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 $55.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $53.82 ($58.14 -$3.84 -$.48) provides 7.4% 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, ten of the eleven criteria are achieved for this JPMorgan position.




4. S&P 500 ETF (SPY) -- New 100% Cash-Secured Puts Position 
The transaction was as follows:
06/27/2016  Sold 3 SPY Jul2016 $192.50 100% cash-secured Put options @ $1.86
Note: the price of SPY was $199.75 today when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $57,750.00
= $192.50*300

Net Profit:
(a) Options Income: +$547.80
= ($1.86*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SPY is above $192.50 strike price at Jul2016 expiration): +$0.00
= ($192.50-$192.50)*300 shares

Total Net Profit (If SPY is above $192.50 strike price at Jul2016 options expiration): +$547.80
= (+$547.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If SPY is above $192.50 strike price at Jul2016 options expiration): +0.9%
= +$547.80/$57,750.00
Annualized Return: +19.8%
= (+$547.80/$57,750.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $190.64 ($192.50 - $1.86), which is 4.6% below the current market price of $199.75.
The 'crossover price' at expiration is $201.61 ($199.75 + $1.86).  This is the price above which it would have been more profitable to buy-and-hold SPY until the Jul2016 options expiration date rather than selling these Put options.

Sunday, May 8, 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 2.43 (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 2.43 is slightly lower than the 2.57 from the prior analysis conducted in early March this year.

One factor that is Very Bearish is the P/E Ratio.  The current P/E ratio is 22.1 (calculated based on the average of the Operating and As Reported earnings for the past year for the S&P 500).  This is much higher than the expected current P/E ratio of 16.0 (based on the current low 0.9% CPI-U inflation rate for the past year).  The market would have to decline by 27.6% from its current level to reach a P/E ratio of 16.0.  Despite the fact that both macroeconomic factors are Slightly Bullish, it is this important value factor (i.e. P/E ratio) that explains why the Covered Calls Advisor is in no hurry to establish new positions at this time.  

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

Sunday, May 1, 2016

Returns -- Year-to-Date Through April 2016

As shown in the "Year-to-Date 2016" line in the chart below, the Covered Calls Advisor Portfolio (CCAP) has underperformed the benchmark Russell 3000 index by 1.37 percentage points for the first four months of calendar year 2016. 















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 adjusts for 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