Tuesday, January 24, 2012

Establish Juniper Networks Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Juniper Networks Inc.(JNPR) covered calls as follows:

Established Juniper Networks Inc.(JNPR) Covered Calls for Feb2012:
01/24/2012 Bought 300 JNPR @ $22.89
01/24/2012 Sold 3 JNPR Feb2012 $23.00 Calls @ $1.15

Two possible overall performance results(including commissions) for the Juniper Networks Inc.(JNPR) transactions would be as follows:

Stock Purchase Cost: $6,875.95
= ($22.89*300+$8.95 commission)

Net Profit:
(a) Options Income: +$333.80
= ($1.15*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $22.89): -$8.95
= ($22.89-$222.89)*300 - $8.95 commissions
(c) Capital Appreciation (If JNPR above $23.00 at Feb2012 expiration): +$24.05
+($23.00-$22.89)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $22.89): +$324.85
= (+$333.80 +$0.00 -$8.95)
Total Net Profit(If stock price above $23.00 at Feb2012 options expiration): +$357.85= (+$333.80 +$0.00 +$24.05)

1. Absolute Return if Unchanged at $22.89: +4.7%
= +$324.85/$6,875.95
Annualized Return If Unchanged (ARIU): +69.0%
= (+$324.85/$6,875.95)*(365/25 days)

2. Absolute Return (If stock price above $23.00 at Feb2012 options expiration): +5.2%= +$357.85/$6,875.95
Annualized Return (If stock price above $23.00 at expiration): +76.0%
= (+$357.85/$6,875.95)*(365/25 days)

The downside breakeven price at expiration is at $21.74 ($22.89 - $1.15). Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Juniper Networks covered calls position is 68.1%. This compares with a probability of profit of 51.0% for a buy-and-hold of Juniper over the same time period.

The upside crossover price at expiration is $24.04 ($22.89 + $1.15).
This is the price above which it would have been more profitable to simply buy-and-hold JNPR until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the covered calls position.

2 comments:

  1. since JNPR released earnings tonite, do you repair this position-

    ReplyDelete
  2. The earnings miss was bad enough. But the even more disturbing part was the grim guidance provided for next quarter. It's time to exit this position and I will make a blog post on the same day that I do so.

    Jeff

    ReplyDelete