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Wednesday, July 20, 2011

Establish Valero Energy Corp. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Valero Energy Corp.(VLO) covered calls as follows:

Established Valero Energy Corp.(VLO) Covered Calls for Aug2011:
07/20/2011 Bought 300 VLO @ $25.72
07/20/2011 Sold 3 VLO Aug2011 $26.00 Calls @ $.97
Note: the price of VLO was $25.81 when the call options were sold.
08/15/2011 Ex-dividend payment of $.05 per share.

With total capacity of approximately 3.0 million barrels per day, Valero Energy Corp. is the largest petroleum refiner and marketer in the U.S. The company has the industry's most complex and sophisticated refining system. Most of its 16 refineries throughout the U.S., Canada and Aruba are able to process heavy, low-quality crude oil. The company has a growing network of retail outlets in the Great Plains, Southwest and Northeast.

VLO rates above the minimum total points necessary for purchase on the CCAP 'Buy Alerts' spreadsheet (See below that Total Points of 17.92 is above this advisor's required threshold of 16.0), so it was decided to establish a covered calls position in VLO with an Aug2011 expiration.

Note: Click on chart above for larger image.

Two possible overall performance results(including commissions) for the Valero Energy Corp.(VLO) transactions would be as follows:

Stock Purchase Cost: $7,724.95
= ($25.72*300+$8.95 commission)

Net Profit:
(a) Options Income: +$279.80
= ($.97*300 shares) - $11.20 commissions
(b) Dividend Income: +$15.00 = $.05*300 shares (ex-dividend expected on 8/15/2011)
(c) Capital Appreciation (If stock price unchanged at $25.72): -$8.95
= ($25.72-$25.72)*300 - $8.95 commissions
(c) Capital Appreciation (If VLO above $26.00 at Aug2011 expiration): +$75.05
+($26.00-$25.72)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $25.72): +$285.85
= (+$279.80 +$15.00 -$8.95)
Total Net Profit(If stock price above $26.00 at Aug2011 options expiration): +$369.85= (+$279.80 +$15.00 +$75.05)

Absolute Return if Unchanged at $25.72: +3.7%
= +$285.85/$7,724.95
Annualized Return If Unchanged (ARIU): +43.6%
= (+$285.85/$7,724.95)*(365/31 days)

Absolute Return (If stock price above $26.00 at Aug2011 options expiration): +4.8%
= +$369.85/$7,724.95
Annualized Return (If stock price above $26.00 at expiration): +56.4%
= (+$369.85/$7,724.95)*(365/23 days)

The downside breakeven price at expiration is at $24.75 ($25.72 - $.97).
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 Valero Energy Corp.(VLO) covered calls position is 66.1%. This compares with a probability of profit of 51.8% for a buy-and-hold of Valero over the same time period.

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