A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Market Vectors Russia Index ETF (Symbol RSX) covered calls as follows:
Established Market Vectors Russia Index ETF (RSX) Covered Calls for Feb2012:
03/23/2012 Bought 300 RSX @ $30.85
03/23/2012 Sold 3 RSX Apr2012 $31.00 Calls @ $1.10
Note: the price of RSTX was $30.95 these call options were sold.
Although there are unlimited outcomes, two possible overall performance results(including commissions) for this Market Vectors Russia Index ETF (RSX) position are as follows:
Stock Purchase Cost: $9,263.95
= ($30.85*300 + $8.95 commission)
(a) Options Income: +$318.80
= ($1.10*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If price of RSX is unchanged at $30.85): -$8.95
= ($30.85-$30.85)*300 - $8.95 commissions
(c) Capital Appreciation (If RSX above $31.00 at Apr2012 expiration): +$36.05
+($31.00-$30.85)*300 - $8.95 commissions
Total Net Profit(If RSX unchanged at $30.85): +$309.85
= (+$318.80 +$0.00 -$8.95)
Total Net Profit(If RSX above $31.00 at Apr2012 options expiration): +$354.85
= (+$318.80 +$0.00 +$36.05)
1. Absolute Return if Unchanged at $30.85: +3.3%
Annualized Return If Unchanged (ARIU): +40.7%
= (+$309.85/$9,263.95)*(365/30 days)
2. Absolute Return (If RSX above $31.00 at Apr2012 options expiration): +3.8%
Annualized Return (If TBT above $19.00 at expiration): +46.6%
= (+$354.85/$9,263.95)*(365/30 days)
The downside 'breakeven price' at expiration is at $29.75 ($30.85 - $1.10).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Apr2012 options expiration) for this Market Vectors Russia Index ETF (RSX) covered calls position is 66.7%. This compares with a probability of profit of 51.1% for a buy-and-hold of RSX over the same time period.
The 'crossover price' at expiration is $32.10 ($31.00 + $1.10).
This is the price above which it would have been more profitable to simply buy-and-hold this Russia ETF until April 21, 2012 (the Apr2012 options expiration date) rather than holding the covered calls position. The Options Pricing Model indicates that the probability that this will occur is 33.8%.