Monday, August 17, 2015

Established Short 100% Cash-Secured Puts Position in iShares China Large-Cap ETF

Today, the Covered Calls Advisor established a 100% cash-secured Puts position in iShares China Large-Cap ETF (Symbol FXI) by selling 3 Sep2015 Put options at the $38.50 strike price. This position indicates that the Covered Calls Advisor is willing to purchase FXI shares at $38.50 (for future covered calls investments) upon the market close on September 18th if the stock declines to below $38.50 at that time.  This is a somewhat conservative investment since FXI was at $39.75 (3.1% above the strike price) when this position was established.

As detailed below, this investment will achieve a +1.9% absolute return in 33 days (which is equivalent to a +21.0% annualized return) if FXI remains above $38.50 at the September 18th options expiration date.

This transaction and the associated potential return-on-investment result is detailed below.

1.  iShares China Large-Cap ETF (FXI) -- New Position
The transaction was as follows:
08/17/2015 Sold 3 iShares China Large-Cap ETF Sep2015 $38.50 Puts @ $.77
Note: The price of FXI was $39.75 when this transaction was executed.

Note: 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 three Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $11,550.00
= $38.50*300
Note:  the price of FXI was $39.75 when the Put options were sold.

Net Profit:
(a) Options Income: +$219.80
= ($.77*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI is above $38.50 strike price at Sep2015 expiration): +$0.00
= ($38.50-$38.50)*300 shares

Total Net Profit (If FXI is above $38.50 strike price upon the Sep2015 options expiration): +$219.80
= (+$219.80 +$0.00 +$0.00)

Absolute Return (If FXI is above $38.50 strike price at Sep2015 options expiration): +1.9%
= +$219.80/$11,550.00
Annualized Return: +21.0%
= (+$219.80/$11,550.00)*(365/33 days)

The downside 'breakeven price' at expiration is at $37.73 ($38.50 - $.77), which is 5.1% below the current market price.
The 'crossover price' at expiration is $40.52 ($39.75 + $.77).  This is the price above which it would have been more profitable to simply buy-and-hold FXI shares until September 18th (the Sep2015 options expiration date) rather than selling these Put options.

Saturday, August 15, 2015

Early Exercise of Chevron Corporation Covered Calls Position

Early this morning I received both an email and a phone call notification from my broker that the covered calls position in Chevron Corporation (Ticker Symbol CVX) with an Aug2015 expiration and at the $84.00 strike price was exercised early. The Chevron shares had risen from $85.24 when purchased to $85.99 at yesterday's market close and the time value remaining in the call option had declined to only about $.05; so the owner of the Call options exercised his/her option to buy the shares at the $84.00 strike price in order to capture Monday's quarterly ex-dividend payment of $1.07 per share.

The actual return-on-investment result for this closed position was 0.5% absolute return (equivalent to +44.2% annualized return for the 4 day holding period).


The transactions associated with this Chevron Corporation position were as follows:
08/12/2015 Bought 200 CVX shares @ $85.24
08/12/2015 Sold 2 CVX Aug2015 $84.00 Call options @ $1.75
08/15/2015 Sold 200 CVX shares assigned @ $84.00

The performance result (including commissions) for this Chevron (CVX) covered calls position was as follows:
Stock Purchase Cost: $17,056.95
= ($85.24*200+$8.95 commission)

Net Profit:
(a) Options Income: +$339.55
= ($1.75*200 shares) - $10.45 commissions
(b) Dividend Income (Option exercised early on business day prior to Aug 17th ex-div date): +$0.00;
(c) Capital Appreciation [Stock assigned early on Aug 14th (business day prior to Aug 17th ex-div date)]: -$256.95
+($84.00-$85.24)*200 - $8.95 commissions
Total Net Profit: +$82.60
= (+$339.55 +$0.00 -$256.95)

Absolute Return: +0.5%
= +$82.60/$17,056.95
Annualized Return on Investment: +44.2%
= (+$82.60/$17,056.95)*(365/4 days)

Friday, August 14, 2015

Established New Short Put Options Position in Dow Chemical Company

Yesterday, the Covered Calls Advisor established a new position in Dow Chemical Company (ticker symbol DOW) by selling three Sep2015 Put options at the $43.00 strike price. This position is a conservative one since it was established with 5.0% downside protection to the strike price.

As detailed below, the Dow Chemical investment will yield a +1.9% absolute return in 37 days (which is equivalent to a +19.1% annualized return-on-investment) if Dow Chemical closes above the $43.00 strike price on the Sep2015 options expiration date. 

This potential return is very good given the substantial 5.0% downside protection (from the current $45.25 stock price to the $43.00 strike price) when the position was established.  The implied volatility in the options was relatively high at 32 when this position was established; so the $.87 price per share received when the Puts were sold is very attractive to us option sellers, especially since the level of unknowns between now and the Sep2015 options expiration is relatively low, given that DOW has already announced their 2nd quarter earnings results.  

1.  Dow Chemical Company (DOW) -- New Position
The transaction was as follows:
08/13//2015  Sold 3 DOW Sep2015 $43.00 100% cash-secured Put options @ $.87
Note: The price of DOW was $45.25 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $12,908.95
= $43.00*300 + $8.95

Net Profit:
(a) Options Income: +$249.80
= ($.87*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DOW is above $43.00 strike price at Sep2015 expiration): +$0.00
= ($43.00-$43.00)*300 shares

Total Net Profit (If DOW is above $43.00 strike price at Sep2015 options expiration): +$249.80
= (+$249.80 +$0.00 +$0.00)

Absolute Return (If DOW is above $43.00 strike price at Sep2015 options expiration): +1.9%
= +$249.80/$12,908.95
Annualized Return (If DOW is above $43.00 at expiration): +19.1%
= (+$249.80/$12,908.95)*(365/37 days)

The downside 'breakeven price' at expiration is at $42.13 ($43.00 - $.87), which is 6.9% below the current market price of $45.25.
The 'crossover price' at expiration is $46.12 ($45.25 + $.87).  This is the price above which it would have been more profitable to simply buy-and-hold Dow Chemical stock until Sept 18th (the Sep2015 options expiration date) rather than selling these Put options.

Wednesday, August 12, 2015

Covered Calls Position Established in Chevron Corporation

Today, a new covered calls position was established in Chevron (ticker symbol CVX) with an Aug2015 expiration.  The Chevron stock was purchased at $85.24 and the Aug2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $84.00 strike price for $1.75 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Aug 17th) prior to the August 21st options expiration date.  Details of this position is provided below.

1. Chevron Corp. (CVX)
A $1.07 quarterly dividend goes ex-dividend on August 17th.  If the current time value (i.e. extrinsic value) of $.51 [$1.75 option premium - ($85.24 stock price - $84.00 strike price)] remaining in the short call options decays further by this Friday (the day prior to next Monday's ex-div date), then there is a good possibility that the call option owner will exercise his/her option on Friday and will call the stock away to capture the dividend.  

As shown below, either early assignment this Friday or assignment at the Aug2015 options expiration date (a week from this Friday) will provide excellent return-on-investment results.
These two potential return-on-investment results for this Chevron covered calls position are:
If Early Assignment: +0.5% absolute return (equivalent to +35.4% annualized return for the next 5 days) if the stock is assigned early (the business day prior to the Aug 17th ex-div date); OR
If Dividend Capture:  +1.7% absolute return (equivalent to +63.5% annualized return over the next 10 days) if the stock is assigned at Aug2015 expiration on August 21st.

08/12/2015 Bought 200 CVX shares @ $85.24
08/12/2015 Sold 2 CVX Aug2015 $84.00 Call options @ $1.75
08/17/2015 Upcoming ex-dividend of $1.07 per share

Two possible overall performance results (including commissions) for this Chevron (CVX) covered calls position are as follows:
Stock Purchase Cost: $17,056.95
= ($85.24*200+$8.95 commission)

Net Profit:
(a) Options Income: +$339.55
= ($1.75*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Aug 17th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Aug2015 expiration): +$214.00
= ($1.07 dividend per share x 200 shares)
(c) Capital Appreciation [If stock assigned early on Aug 14th (business day prior to Aug 17th ex-div date)]: -$256.95
+($84.00-$85.24)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $84.00 at Aug2015 expiration): -$256.95
+($84.00-$85.24)*200 - $8.95 commissions

Total Net Profit (If option exercised on business day prior to Aug 17th ex-div date): +$82.60
= (+$339.55 +$0.00 -$256.95); or
Total Net Profit (If stock assigned at $84.00 at Aug2015 expiration): +$296.60
= (+$339.55 +$214.00 -$256.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +0.5%
= +$82.60/$17,056.95
Annualized Return (If option exercised early): +35.4%
= (+$82.60/$17,056.95)*(365/5 days); OR

2. Absolute Return (If stock assigned at $84.00 at Aug2015 expiration): +1.7%
= +$296.60/$17,056.95
Annualized Return (If stock assigned): +63.5%
= (+$296.60/$17,056.95)*(365/10 days)

Either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $84.00 strike price at assignment.