Monday, January 24, 2011

Establish Best Buy, Microsoft Corp., and Oshkosh Corp. Covered Calls

Three new covered calls positions were established today in the Covered Calls Advisor Portfolio(CCAP) with a portion of the cash received when six Jan2011 covered calls positions were assigned at expiration last Friday. Two of these purchases (Best Buy and Microsoft) are repeats of successful covered calls holdings that were called away at Jan2011 expiration. The detailed information for each position and some potential results from each postion are as follows:

1. Best Buy Corp.(BBY)
Established Best Buy Corp.(BBY) Covered Calls for Feb2011 as follows:
01/24/2011 Bought 300 BBY @ $35.13
01/24/2011 Sell-to-Open(STO) 3 BBY Feb2011 $36.00 Calls @ $.57

Two possible overall performance results(including commissions) for the Best Buy Corp.(BBY) transactions would be as follows:
Stock Purchase Cost: $10,547.95
= ($35.13*300+$8.95 commission)

Net Profit:
(a) Options Income: +$159.80
= (300*$.57 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $35.13):
-$8.95 = ($35.13-$35.13)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $36.00): +$252.05
= ($36.00-$35.13)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $35.13): +$150.85
= (+$159.80 +$0.00 -$8.95)
Total Net Profit(If stock assigned at $36.00): +$411.85
= (+$159.80 +$0.00 +$252.05)

Absolute Return if Unchanged at $35.13: +1.4%
= +$150.85/$10,547.95
Annualized Return If Unchanged (ARIU): +20.1%
= (+$150.85/$10,547.95)*(365/26 days)

Absolute Return if Assigned at $36.00: +3.9%
= +$411.85/$10,547.95
Annualized Return If Assigned (ARIA): +54.8%
= (+$411.85/$10,547.95)*(365/26 days)

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2011 options expiration) for this Best Buy covered calls position is 60.1%. This compares with a probability of profit of 50.6% for a buy-and-hold of Best Buy stock over the same timeframe.


2. Microsoft Corp.(MSFT)
Established Microsoft Corp.(MSFT) Covered Calls for Feb2011 as follows:
01/24/2011 Bought 700 MSFT @ $28.15
01/24/2011 Sell-to-Open(STO) 7 MSFT Feb2011 $29.00 CallS @ $.40

Two possible overall performance results(including commissions) for the Microsoft Corp.(MSFT) transactions would be as follows:
Stock Purchase Cost: $19,713.95
= ($28.15*700+$8.95 commission)

Net Profit:
(a) Options Income: +$265.80
= 700*$.40 - $14.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $28.15):
-$8.95 = ($28.15-$28.15)*700 - $8.95 commissions
(c) Capital Appreciation (If assigned at $29.00): +$586.05
= ($29.00-$28.15)*700 - $8.95 commissions

Total Net Profit(If stock price unchanged at $28.15): +$256.85
= (+$265.80 +$0.00 -$8.95)
Total Net Profit(If stock assigned at $29.00): +$851.85
= (+$265.80 +$0.00 +$586.05)

Absolute Return if Unchanged at $28.15: +1.3%
= +$256.85/$19,713.95
Annualized Return If Unchanged (ARIU): +18.3%
= (+$256.85/$19,713.95)*(365/26 days)

Absolute Return if Assigned at $29.00: +4.3%
= +$851.85/$19,713.95
Annualized Return If Assigned (ARIA): +60.7%
= (+$851.85/$19,713.95)*(365/26 days)

The probability of profit (if held until Feb2011 options expiration) for this Microsoft covered calls position is 60.1% versus 50.6% for a buy-and-hold of Microsoft stock over the same timeframe.


3. Oshkosh Corp.(OSK)
Established Oshkosh Corp.(OSK) Covered Calls for Feb2011 as follows:
01/24/2011 Bought 300 OSK @ $36.18
01/24/2011 Sell-to-Open(STO) 3 OSK Feb2011 $37.00 CallS @ $1.20

Two possible overall performance results(including commissions) for the Oshkosh Corp.(OSK) transactions would be as follows:
Stock Purchase Cost: $10,862.95
= ($36.18*300+$8.95 commission)

Net Profit:
(a) Options Income: +$348.80
= 300*$1.20 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $36.18):
-$8.95 = ($36.18-$36.18)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $37.00): +$237.05
= ($37.00-$36.18)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $36.18): +$339.85
= (+$348.80 +$0.00 -$8.95)
Total Net Profit(If stock assigned at $37.00): +$585.85
= (+$348.80 +$0.00 +$237.05)

Absolute Return if Unchanged at $36.18: +1.7%
= +$339.85/$10,862.95
Annualized Return If Unchanged (ARIU): +24.2%
= (+$339.85/$10,862.95)*(365/26 days)

Absolute Return if Assigned at $37.00: +5.4%
= +$585.85/$10,862.95
Annualized Return If Assigned (ARIA): +75.7%
= (+$585.85/$10,862.95)*(365/26 days)

The probability of profit (if held until Feb2011 options expiration) for this Oshkosh covered calls position is 64.6% versus 52.1% for a buy-and-hold of Oshkosh stock over the same timeframe.

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