Thursday, July 21, 2011

Establish General Motors Co. Covered Calls

A new covered calls position was established yesterday in the Covered Calls Advisor Portfolio(CCAP) with the purchase of General Motors Co.(GM) covered calls as follows:

Established General Motors Co.(GM) Covered Calls for Aug2011:
07/20/2011 Bought 300 GM @ $29.32
07/20/2011 Sold 3 GM Aug2011 $30.00 Calls @ $.79
Note: the price of GM was $29.45 when the call options were sold.

GM rates slightly above the minimum total points necessary for purchase on the CCAP 'Buy Alerts' spreadsheet (see below that Total Points of 16.44 is above this advisor's required buy threshold of 16.0). GM's balance sheet has solidified and the current valuation metrics are extremely attractive. There is 50%+ upside potential in GM's stock price over the next year if two situations occur: (1) GM achieves reasonably successful new product launches for the 2012 and 2013 model years; and (2) there is an upturn in annualized GDP in the U.S. in the vicinity of 3.0%. The Covered Calls Advisor believes that both of these outcomes are likely, so a moderately bullish covered calls position in GM was established.

Note: Click on chart above for larger image.

Two possible overall performance results(including commissions) for the General Motors transactions are as follows:

Stock Purchase Cost: $8,804.95
= ($29.32*300+$8.95 commission)

Net Profit:
(a) Options Income: +$225.80
= ($.79*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $29.32): -$8.95
= ($29.32-$29.32)*300 - $8.95 commissions
(c) Capital Appreciation (If GM above $30.00 at Aug2011 expiration): +$195.05
+($30.00-$29.32)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $29.32): +$216.85
= (+$225.80 +$0.00 -$8.95)
Total Net Profit(If stock price above $30.00 at Aug2011 options expiration): +$420.85= (+$225.80 +$0.00 +$195.05)

Absolute Return if Unchanged at $29.32: +2.5%
= +$216.85/$8,804.95
Annualized Return If Unchanged (ARIU): +29.0%
= (+$216.85/$8,804.95)*(365/31 days)

Absolute Return (If stock price above $30.00 at Aug2011 options expiration): +4.8%
= +$420.85/$8,804.95
Annualized Return (If stock price above $30.00 at expiration): +56.3%
= (+$420.85/$8,804.95)*(365/31 days)

The downside breakeven price at expiration is at $28.53 ($29.32 - $.79).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Aug2011 options expiration) for this General Motors covered calls position is 64.3%. This compares with a probability of profit of 51.7% for a buy-and-hold of GM over the same time period.