A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Xilinx Inc.(XLNX) covered calls as follows:
Established Xilinx Inc.(XLNX) Covered Calls for Feb2012:
01/25/2012 Bought 300 XLNX @ $35.30
01/25/2012 Sold 3 XLNX Feb2012 $34.00 Calls @ $1.60
Xilinx (along with Altera) is a primary company in the near-duopoly market for Programmable Logic Devices (PLDs), a sub-industry within the Semiconductor industry. Xilinx recently reported 4th quarter earnings results that exceeded estimates.
This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $.19 with an ex-dividend date of Feb 6th. If the current $.30 [$1.60-($35.30-$34.00)] time value (i.e. extrinsic value) remaining in the short call option decays to less than $.19 by Feb 5th, then there is some possibility that the call options owner will exercise early and will call the stock away to capture the dividend. As shown below, two potential returns for this position are:
+18.2% annualized return if the stock is assigned at Feb2012 expiration
+20.0% annualized return if the stock is assigned early
This Covered Calls Advisor has a slight preference that the options owner is enticed to exercise early -- which would result in a somewhat higher annualized return-on-investment for this position. My thanks to Ed Boot, who described this strategy in a post on the JustCoveredCalls Yahoo! Group site.
Two possible overall performance results(including commissions) for the Xilinx Inc.(XLNX) transactions would be as follows:
Stock Purchase Cost: $10,598.95
= ($35.30*300+$8.95 commission)
(a) Options Income: +$468.80
= ($1.60*300 shares) - $11.20 commissions
(b) Dividend Income (If stock assigned at Feb2012 expiration): +$57.00
= $.19 per share x 300 shares
(b) Dividend Income (If option exercised early on day prior to Feb 6th ex-div date): +$0.00
(c) Capital Appreciation (If stock assigned at $34.00): -$398.95
+($34.00-$35.30)*300 - $8.95 commissions
Total Net Profit(If stock assigned at Feb2012 expiration): +$126.85
= (+$468.80 +$57.00 -$398.95)
Total Net Profit(If option exercised on day prior to Feb 6th ex-div date): +$69.85
= (+$468.80 +$0.00 -$398.95)
1. Absolute Return (If stock assigned at Feb2012 expiration): +1.2%
Annualized Return (If stock assigned at Feb2012 expiration): +18.2%
= (+$126.85/$10,598.95)*(365/24 days)
2. Absolute Return (If option exercised on day prior to Feb 6th ex-div date): +0.7% = +$69.85/$10,598.95
Annualized Return (If option exercised early): +20.0%
= (+$675.85/$10,598.95)*(365/12 days)
The downside breakeven price at expiration is at $33.70 ($35.30 - $1.60).
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 Xilinx Inc.(XLNX) covered calls position is 72.7%. This compares with a probability of profit of 50.3% for a buy-and-hold of Xilinx over the same time period.
The upside crossover price at expiration is $35.79 ($34.00 + $1.60 +$.19 dividend).
This is the price above which it would have been more profitable to simply buy-and-hold XLNX stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the covered calls position.
The potential annualized returns in this position are attractive, but somewhat less than the desired +25% minimum annualized ROI that the Covered Calls Advisor prefers when establishing a covered calls position. The Implied Volatility (IV) in the XLNX options was 23.5 when these options were sold today. To reach the +25% minimum ROI threshold, equities with somewhat higher IVs will be targeted for applying this strategy in the future.