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Friday, July 13, 2018

Established Covered Calls Position in Halliburton Co.

Yesterday, a Covered Calls position has been established in Halliburton Co. (ticker HAL) at the $45.00 strike price and for the July 20th, 2018 options expiration date.  This position is slightly out-of-the-money since the 400 shares of HAL stock was purchased at $44.82 (just below the $45.00 strike price).

As detailed below, two potential return-on-investment results are:

  • +1.5% absolute return in 9 days (equivalent to a +59.7% annualized return-on-investment) if the price of HAL is unchanged upon the July 20th options expiration; OR
  • +1.9% absolute return in 9 days (equivalent to a +75.0% annualized return-on-investment) if the price of HAL increases above the $45.00 strike price on the expiration date 


  • Halliburton Co. (HAL) -- New Covered Calls Position
    The transactions were as follows:
    07/12/2018 Bought 400 shares of Halliburton Co. @ $44.82 
    07/12/2018 Sold 4 HAL July 20th, 2018 $45.00 Call options @ $.65 per share
    Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of these Call options was 24.0 

    Two possible overall performance result (including commissions) would be as follows:
    Covered Calls Cost Basis: $17,675.63
    = ($44.82 - $.65)* 400 shares + $7.63 commission

    Net Profit Components:
    (a) Options Income: +$260.00
    = ($.65* 400 shares)
    (b) Dividend Income: +$0.00
    (c) Capital Appreciation (If HAL is unchanged at $44.82 purchase price at July 20th expiration): +$0.00
    = ($44.82 -$44.82)* 400 shares; OR
    (c) Capital Appreciation (If HAL is above $45.00 strike price at Jul 20th expiration): +$67.05
    = ($45.00 -$44.82)* 400 shares - $4.95 commission

    (a) Total Net Profit (If HAL price unchanged at $44.82 at expiration): +$260.00
    = (+$260.00 options income +$0.00 dividend income -$0.00 capital appreciation); OR
    (b) Total Net Profit (If HAL shares assigned at expiration): +$327.05
    = (+$260.00 options income +$0.00 dividend income +$67.05 capital appreciation)

    (a) Absolute Return (If HAL price unchanged at expiration): +1.5%
    = +$260.00/$17,675.63
    Equivalent Annualized Return: +59.7%
    = (+$260.00/$17,675.63)*(365/9 days); OR
    (b) Absolute Return (If HAL shares assigned at expiration): +1.9%
    = +$327.05/$17,675.63
    Equivalent Annualized Return: +75.0%
    = (+$327.05/$17,675.63)*(365/9 days)

    The downside 'breakeven price' at expiration is at $44.17 ($44.82 price per share - $.65 options income), which is 1.5% below the current market price of $44.82.

    Thursday, July 5, 2018

    Established New Position in Deere & Co.

    Today, a good-til-cancelled order was placed to sell two July 20th, 2018 Deere & Co. (ticker DE) Put options at the $138.00 strike price for $2.68 per share.  At 10:45am, the order was executed when the stock was at $139.28. 

    As detailed below, there is potential for a +1.9% absolute return in 16 days (equivalent to a +43.8% annualized return-on-investment).

    Deere & Co. (DE) -- New 100% Cash-Secured Puts Position
    This position was established when the price of Deere & Co. stock was $139.28 (0.9% downside protection to the strike price) and 16 days remaining until the July 20th options expiration date.

    With the recent increase in international trade tariff threats, agricultural stocks like John Deere have seen a swift decline in price accompanied by a substantial rise in the implied volatility of options, so the $2.68 price per share received when the Puts were sold is an attractive premium to receive for these out-of-the-money Put options.

    Selling 100% Cash-Secured Puts is synthetically equivalent to Covered Calls.  In this case, Puts were chosen because of their better options liquidity (and thus tighter bid/ask spread).  The open interest at the $138.00 strike price for the Calls was 946 contracts but only 109 for their counterpart Call options.     

    The transaction was as follows:
    07/05/2018  Sold 2 DE July 20, 2018 $138.00 100% cash-secured Put options @ $2.68

    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 two Put options sold.

    A possible overall performance result (including commissions) would be as follows:
    100% Cash-Secured Cost Basis: $27,600.00
    = $138.00*200 shares

    Net Profit:
    (a) Options Income: +$529.71
    = ($2.68*200 shares) - $6.29 commissions
    (b) Dividend Income: +$0.00
    (c) Capital Appreciation (If Deere stock is above $138.00 strike price at July 20,2018 expiration): +$0.00
    = ($138.00-$138.00)*200 shares

    Total Net Profit (If Deere stock price is above $138.00 strike price at July 20th options expiration): +$529.71
    = (+$529.71 options income +$0.00 dividend income +$0.00 capital appreciation)

    Absolute Return (If Deere stock is above $138.00 strike price at July 20th, 2018 options expiration): +1.9%
    = +$529.71/$27,600.00
    Annualized Return: +43.8%
    = (+$529.71/$27,600.00)*(365/16 days)

    The downside 'breakeven price' at expiration is at $135.32 ($138.00 - $2.68), which is 2.8% below the current market price of $139.28.

    Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the July 20th options expiration) for this John Deere & Co. short Puts position is 57.4%. This compares with a probability of profit of 50.4% for a buy-and-hold of Deere shares over the same time period. Using this probability of profit of 57.4%, the expected value annualized return-on-investment (if held until expiration) is +25.1% (+43.8% * 57.4%), an attractive risk/reward profile for this relatively conservative investment.  

    Tuesday, July 3, 2018

    Roll Out Covered Calls in Blackstone Group LP

    Today, a continuation Covered Calls position was established in Blackstone Group L.P. (ticker BX) for the July 20th, 2018 options expiration at the $35.00 strike price.  When the stock was at $34.02 today and the July 20th, 2018 $35.00 Calls were priced at $.32, this Advisor decided to sell 5 Call options against the 500 shares of BX stock currently held in the portfolio.

    As detailed below, two potential return-on-investment results are (1) a +0.2% absolute return in 170 days (equivalent to a +0.4% annualized return-on-investment) if BX stock price unchanged at $34.02 at July 20th options expiration; or (2) a +3.0% absolute return in 170 days (equivalent to a +6.4% annualized return-on-investment) if assigned at the July 20th expiration.

    Blackstone Group L.P. (BX) -- Roll Out Covered Calls Position
    The implied volatility of the Call options was 22.5 and the open interest was 2,842 contracts today when this transaction was made. 

    The transactions to-date are as follows:
    01/31/2018 Bought 500 shares of Blackstone Group stock @ $36.24 per share 
    01/31/2018 Sold 5 BX February 16th, 2018 $35.00 Call options @ $1.50 per share
    Note: this was a simultaneous Buy/Write transaction
    02/01/2018 Rolled-Up-and-Out to the March 16th, 2018 $36.00 strike price at at net debit of $.70 ($2.19 - $1.49) per share
    02/08/2018 $425.00 (Ex-distribution of $.85 per share x 500 shares)
    03/16/2018 Call options expired with stock price below strike price
    05/07/2018 $175.00 received (ex-distribution of $.35 x 500 shares)
    07/03/2018 Sold 5 July 20, 2018 $35.00 Call options @ $.32 per share
    Note: the price of BX was $34.02 when these options were sold

    Two possible overall performance results (including commissions) would be as follows:
    Covered Calls Cost Basis: $17,378.30
    = ($36.24 - $1.50)* 500 shares + $8.30 commissions

    Net Profit Components:
    (a) Options Income: +$543.40
    = ($1.50 - $.70 + $.32) * 500 shares -2*$8.30 commissions

    (b) Distribution Income:  $600.00
    = ($.85 + $.35) per share * 500 shares 
    (c) Capital Appreciation (If BX stock price is unchanged at $34.02 at July 20th options expiration):  -$1,114.95
    = ($34.02 - $36.24) * 500 shares -$4.95 commission; OR
    (c) Capital Appreciation (If BX stock price is assigned at $35.00 strike price at July 20th options expiration): -$624.95
    = ($35.00 - $36.24) * 500 shares -$4.95 commission

    1. Total Net Profit (If BX stock price unchanged at $34.02 at July 20th options expiration):  +$28.45
    = (+$543.40 options income +$600.00 distribution income -$1,114.95 capital appreciation); OR
    2. Total Net Profit (If BX stock price is assigned at $35.00 strike price at July 20th options expiration):  +$518.45
    = (+543.40 options income + $600.00 distribution income - $624.95 capital appreciation)

    1. Absolute Return (If BX stock price unchanged at $34.02 at July 20th options expiration): +0.2%
    = +$28.45/$17,378.30
    Equivalent Annualized Return: +0.4%
    = (+$28.45/$17,378.30)*(365/170 days); OR
    2. Absolute Return (If BX stock price is assigned at $35.00 strike price at July 20th options expiration): +3.0%
    = +$518.45/$17,378.30
    Equivalent Annualized Return: +6.4%
    = (+$518.45/$17,378.30)*(365/170 days)