Wednesday, October 18, 2017

Early Close of Nucor Corp. Covered Calls

Today, the Covered Calls Advisor closed out the Nucor Corp. (ticker symbol NUE) covered calls position.  This decision was made since the price of Nucor has risen quickly from the $54.16 purchase price to $57.35 today so that there was only $.05 of time value remaining in the Call options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved.  Given the stock price uncertainty inherent in tomorrow's earnings report, the Covered Calls Advisor decided to lock in the profit today.

As detailed below, the actual return-on-investment result for this closed position was a +3.1% absolute return (equivalent to +22.3% annualized return) for the 51 days holding period.  

Nucor Corp. -- Covered Calls Position is Closed
The transactions were as follows:
08/28/2017  Bought 200 Nucor Corp. shares @ $54.16
08/28/2017 Sold 2 NUE October 20, 2017 $52.50 Call options @ $2.96
Note: this was a simultaneous buy/write transaction.
09/28/2017 Ex-dividend of $.3775 per share
10/18/2017 Sold 200 Nucor Corp. shares @ $57.35 per share
10/18/2017 Bought-to-Close 2 NUE Oct 20th, 2017 $52.50 Call options @ $4.90 per share

The overall performance result (including commissions) was as follows:
Cost Basis Purchase of 200 shares NUE: $10,246.29
= ($54.16 -$2.96)*200 + $6.29 commissions

Net Profit:
(a) Options Income: -$389.34
= ($2.96 - $4.90) *200 shares - $1.34 commissions
(b) Dividend Income: +$75.50
= $.3775 per share x 200 shares
(c) Capital Appreciation: +$633.05
= ($57.35 -$54.16)*200 shares - $4.95 commissions

Total Net Profit: +$319.21
= (-$389.34 options income +$75.50 dividends +$633.05 capital appreciation)

Absolute Return: +3.1%
= +$319.21/$10,246.29
Equivalent Annualized Return: +22.3%
= (+$330.55/$10,246.29)*(365/51 days)

Friday, October 13, 2017

Covered Calls Established for CVS Health Corporation

Today, a Covered Calls positions were established in CVS Health Corporation (ticker CVS).  Given the Covered Calls Advisor's current cautious overall market outlook, a moderately in-the-money Covered Calls position was established with the November 17th, 2017 $70.00 Call options when the stock price was $72.84.  This $70.00 strike price is -0.5 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  Also, there is an upcoming $.50 ex-dividend prior to the options expiration date which is taken into consideration in the details presented below.

As detailed below, some potential return-on-investment results are:
  • A +1.65% absolute return (equivalent to +60.1% annualized return for the next 10 days) if the stock is assigned early (business day prior to the October 23rd ex-div date); OR 
  • A +2.37% absolute return (equivalent to +24.0% annualized return over the next 36 days) if the stock is assigned on the Nov 17th, 2017 options expiration date.
Either result exceeds the Covered Calls Advisor's target for a greater than +20% potential annualized return-on-investment.

1. CVS Health Corporation (CVS) -- New Covered Calls Position
As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its synthetically equivalent short 100% Cash-Secured Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "YES*" with an indication that "If 'YES' then consider avoiding position".  This position was established because of the Covered Calls Advisor's confidence that analysts' expectations that upcoming earnings per share will be achieved as well as the relatively narrow range of those estimates. 
Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that CVS will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a Covered Calls position in CVS.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential Covered Calls using a dividend capture strategy.  The minimum threshold desired 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 CVS Covered Calls position.

For this position, the downside 'breakeven price' at expiration is at $68.35 ($72.84 - $3.99 -$.50), which is 6.2% below the current market price of $72.84. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this CVS Covered Calls position is 68.8%, so the expected value annualized ROI of this investment (if held until expiration) is +16.5% (+24.0% * 68.8%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $76.33 ($72.84 + $3.99 -$.50).  This is the price above which it would have been more profitable to simply buy-and-hold CVS stock until Nov 17th (the November monthly options expiration date) rather than establishing this Covered Calls position.

Wednesday, October 11, 2017

Covered Calls Position Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel (ticker symbol X).  This was established when the stock price was $24.69 and eight October 20th, 2017 $24.00 Calls were sold at $1.05.   U.S. Steel has 2.9% downside protection to the $24.00 strike price, a conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral. 


As detailed below, the potential return-on-investment is +1.5% absolute return in 10 days (equivalent to a +54.6% annualized return-on-investment).  


United States Steel (X) -- New Covered Calls Position
The implied volatility of the Call options was 39.5 when this position was established, a very high level considering that there is no earnings report prior to the Oct. 20th expiration date.
The transactions were as follows:
10/11/2017 Bought 800 shares of United States Steel stock @ $24.69 per share 
10/11/2017 Sold 8 US Steel October 20th, 2017 $24.00 Call options @ $1.05 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,922.31
= ($24.69 - $1.05)* 800 shares + $10.31 commission

Net Profit:
(a) Options Income: +$840.00
= ($1.05* 800 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If USS is above $24.00 strike price at Oct 20th expiration): -$556.95
= ($24.00 -$24.69)* 800 shares - $4.95 commission

Total Net Profit (If US Steel stock price is above $24.00 strike price at Oct 20th options expiration): +$283.05
= (+$840.00 options income +$0.00 dividend income -$556.95 capital appreciation)

Absolute Return: +1.5%
= +$283.05/$18,922.31
Annualized Return: +54.6%
= (+$283.05/$18,922.31)*(365/10 days)

The downside 'breakeven price' at expiration is at $23.64 ($24.69 - $1.05), which is 4.3% below the current market price of $24.69.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this U.S. Steel Covered Calls position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of US Steel shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +37.0% (+54.6% * 67.8%).  

The 'crossover price' at expiration is $25.74 ($24.69 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold US Steel stock until the October 20th, 2017 options expiration date.

Tuesday, October 3, 2017

Roll-Up of JPMorgan Chase & Co. Covered Calls

Today, the Covered Calls position in JPMorgan Chase & Co. was rolled up from the October 20th $87.50 strike price to the Oct 20th $95.50 strike price.  With an upcoming dividend of $.56 in two days and the stock deep in-the-money trading at $97.07 per share, there was only $.04 time value remaining in the short Call options.  Therefore, there is a strong likelihood that the stock would have been called away tomorrow by the owner of the Calls to capture the dividend.

The Covered Calls Advisor decided to roll-up to the $95.50 strike price (with $.54 time value remaining) to ensure that the dividend will be captured and that there is also a good possibility of also capturing the $.54 per share time value as additional profit as long as JPM stock is above the $95.50 strike price on the Oct. 20th expiration date.  If this occurs, the financial result would be a +3.2% absolute return in 46 days (equivalent to a +25.2% annualized return-on-investment) for this JPMorgan Chase position.  Details are provided below.
 
1. JPMorgan Chase & Co. (JPM) --  Covered Calls Roll-Up Continuation
The transactions were:
09/05/2017 Bought 300 JPM shares @ $89.26
09/05/2017 Sold 3 JPM October 20th, 2017 $87.50 Call options @ $3.49
Note: a simultaneous buy/write transaction was executed.
10/03/2017 Bought-to-Close 3 JPM Oct. 20th $87.50 Call options @ $9.61 per share
10/03/2017 Sold-to-Open 3 JPM Oct. 20th $95.50 Call options @ $2.11 per share
10/05/2017 Upcoming quarterly ex-dividend of $.56 per share

A possible overall performance result (including commissions) for this ongoing JPM Covered Calls position is as follows:
Stock Purchase Cost Basis: $25,735.95
= ($89.26 - $3.49) * 300 shares +$4.95 commission

Net Profit:
(a) Options Income: -$1,216.92
= ($3.49 -$9.61 +$2.11) *300 shares - 2* $6.96 commissions

(b) Dividend Income (If JPM assigned at October 20th, 2017 expiration): +$168.00
= ($.56 dividend per share x 300 shares)
(c) Capital Appreciation (If JPM assigned at $95.50 strike price): +1,867.05
+($95.50 -$89.26)*300 - $4.95 commission

Total Net Profit (If JPM assigned on Oct. 20th, 2017 at $95.50 strike price): +$818.13
= (-$1,216.92 +$168.00 +$1,867.05)

Absolute Return (If JPM assigned at $95.50 at Oct 20th, 2017 expiration): +3.2%
= +$818.13/$25,735.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +25.2%
= (+$818.13/$25,735.95)*(365/46 days)