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 Oct2011:
09/20/2011 Bought 300 VLO @ $21.30
09/20/2011 Sold 3 VLO Oct2011 $23.00 Calls @ $.62
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 18.24 is above this advisor's required threshold of 16.0), so it was decided to establish a covered calls position in VLO with an Oct2011 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: $6,398.95
= ($21.30*300+$8.95 commission)
(a) Options Income: +$174.80
= ($.62*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $21.30): -$8.95
= ($21.30-$21.30)*300 - $8.95 commissions
(c) Capital Appreciation (If VLO above $23.00 at Oct2011 expiration): +$501.05
+($23.00-$21.30)*300 - $8.95 commissions
Total Net Profit(If stock price unchanged at $21.30): +$165.85
= (+$174.80 +$0.00 -$8.95)
Total Net Profit(If stock price above $23.00 at Oct2011 options expiration): +$675.85= (+$174.80 +$0.00 +$501.05)
1. Absolute Return if Unchanged at $21.30: +2.6%
Annualized Return If Unchanged (ARIU): +43.6%
= (+$165.85/$6,398.95)*(365/32 days)
2. Absolute Return (If stock price above $23.00 at Oct2011 options expiration):
+10.6% = +$675.85/$6,398.95
Annualized Return (If stock price above $23.00 at expiration): +120.5%
= (+$675.85/$6,398.95)*(365/32 days)
The downside breakeven price at expiration is at $20.68 ($21.30 - $.62).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Oct2011 options expiration) for this Valero Energy Corp.(VLO) covered calls position is 60.9%. This compares with a probability of profit of 52.4% for a buy-and-hold of Valero over the same time period.