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Tuesday, July 31, 2012

Established Morgan Stanley Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Morgan Stanley (MS) covered calls as follows:

Established Morgan Stanley (MS) Covered Calls for Aug2012:
07/31/2012 Bought 600 MS @ $13.63
07/31/2012 Sold 6 MS Aug2012 $14.00 Calls @ $.35

The 10-year chart below shows that Morgan Stanley is now trading at a historically low valuation relative to its book value. It is is now priced at about 40% of book value per share versus a historical norm above 100%.
Morgan Stanley Stock Chart


With Morgan Stanley's primary financial metrics now slowly improving, the stock's downside risk seems relatively small now relative to its upside potential.

Two possible overall performance results (including commissions) for this Morgan Stanley position is as follows:
Stock Purchase Cost: $8,186.95
= ($13.63*600+$8.95 commission)

Net Profit:
(a) Options Income: +$196.55
= 600*$.35 - $13.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MS price unchanged at $13.63): -$8.95
= ($13.63-$13.63)*600 - $8.95 commissions
(c) Capital Appreciation (If MS assigned at $14.00): +$213.05
= ($14.00-$13.63)*600 - $8.95 commissions


Total Net Profit(If MS price unchanged at $13.63): +$187.60
= (+$196.55 +$0.00 -$8.95)
Total Net Profit(If MS assigned at $14.00): +$409.60
= (+$196.55 +$0.00 +$213.05)


Absolute Return if Unchanged at $13.63: +2.3%
= +$187.60/$8,186.95
Annualized Return If Unchanged (ARIU): +46.5%
= (+$187.60/$8,186.95)*(365/18 days)

Absolute Return if Assigned at $14.00: +5.0%
= +$409.60/$8,186.95
Annualized Return If Assigned (ARIA): +101.5%
= (+$409.60/$8,186.95)*(365/18 days)

The downside 'breakeven price' at expiration is at $13.28 ($13.63 - $.35).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held 18 days until Aug2012 options expiration) for this Morgan Stanley covered calls position is 62.4%. This compares with a probability of profit of 50.6% for a buy-and-hold of MS over the same time period.

The 'crossover price' at expiration is $14.35 ($14.00 + $.35).
This is the price above which it would have been more profitable to simply buy-and-hold MS until August 18, 2012 (the Aug2012 options expiration date) rather than establishing the covered calls position. The probability of exceeding this crossover price at expiration is 30.7%.

Monday, July 30, 2012

Established Apple Inc. Covered Call

The previous covered call in Apple Inc. was assigned upon Jul2012 options expiration. Today, a new covered call position was established in Apple Inc. with an Aug2012 expiration and at the $585 strike price. The transactions are as follows:

07/30/2012 Bought 100 AAPL shares @ $595.04
07/30/2012 Sold 1 AAPL Aug2012 $585.00 Call Option @ $15.55
08/09/2012 Ex-dividend of $2.65 per share

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $2.65 with an ex-dividend date of Aug 9th. If the current time value (i.e. extrinsic value) remaining in the short call option decays to less than $2.65 by Aug 8th, 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:

+25.7% annualized return if the stock is assigned at Aug2012 expiration
+32.6% annualized return if the stock is assigned early

Either outcome is attractive but the 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.  Two possible overall performance results (including commissions) for this Apple Inc.(AAPL) covered call position are as follows:
Stock Purchase Cost: $59,512.95
= ($595.04*100+$8.95 commission)

Net Profit:
(a) Options Income: +$1,545.30
= ($15.55*100 shares) - $9.70 commissions
(b) Dividend Income (If stock assigned at Feb2012 expiration):  +$265.00
= ($2.65 dividend per share x 100 shares); or
(b) Dividend Income (If option exercised early on day prior to Aug 9th ex-div date): +$0.00
(c) Capital Appreciation (If stock assigned at $585.00): -$1,012.95
+($585.00-$595.04)*100 - $8.95 commissions

Total Net Profit(If stock assigned at $585.00 at Aug2012 expiration): +$797.35
= (+$1,545.30 +$265.00 -$1,012.95); or
Total Net Profit(If option exercised on day prior to Aug 9th ex-div date): +$532.35
= (+$1,545.30 +$0.00 -$1,012.95)

1. Absolute Return (If stock assigned at $585.00 at Aug2012 expiration): +1.3% = +$797.35/$59,512.95
Annualized Return (If stock assigned): +25.7%
= (+$797.35/$59,512.95)*(365/19 days);

OR

2. Absolute Return (If option exercised on day prior to Aug 9th ex-div date): +0.9%
= +$532.35/$59,512.95
Annualized Return (If option exercised early): +32.6%
= (+$532.35/$59,512.95)*(365/10 days)

Established iShares MSCI China ETF Covered Calls

Today, a new covered calls position was established in iShares MSCI China ETF (Symbol FXI) with an Aug2012 expiration and at the $34.00 strike price. The transactions are as follows:

07/30/2012 Bought 1,000 FXI shares @ $34.09
07/30/2012 Sold 10 FXI Aug2012 $34.00 Call Options @ $.80

A possible overall performance result(including commissions) for this iShares MSCI China ETF (FXI) covered calls position is as follows:
Stock Purchase Cost: $34,098.95
= ($34.09*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$783.55 = ($.80*1,000 shares) - $16.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI assigned at $34.00 upon expiration): -$98.95
=+($34.00-$34.09)*1,000 - $8.95 commissions

Total Net Profit(If FXI assigned at $34.00 at Aug2012 expiration): +$684.60
= (+$783.55 +$0.00 -$98.95)

Absolute Return (If FXI assigned at $34.00 at Aug2012 expiration): +2.0%
= +$684.60/$34,098.95
Annualized Return (If stock assigned): +40.7%
= (+$684.60/$34,098.95)*(365/18 days)

Monday, July 23, 2012

Seven Positions Closed

Friday was options expiration for July 2012.  Two positions (Apple Inc. and Halliburton Inc.) were called away upon expiration.  Today, seven positions (Goldcorp Inc., Hartford Financial Services Group, Hess Corp., iShares MSCI China ETF, iShares Emerging Markets ETF, Market Vectors Russia ETF, and Morgan Stanley) were sold.  The cash from these sales will remain in the Covered Calls Advisor Portfolio until new covered calls opportunities arise.  The existing Aug2012 covered calls positions in Mylan Inc. and Valero Energy remain in the portfolio.

Sunday, July 22, 2012

July 2012 Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained eleven covered calls positions with July 2012 expirations. A summary of the results were as follows:

- Three positions (Hess Corp., Mylan Inc., and Valero Energy Corp.) were in-the-money just prior to expiration and the Covered Calls Advisor decided to roll-out to Aug2012 covered calls positions at the same strike prices. The roll-out transactions were posted on the blog earlier this week on the same day that these transactions occurred.

- Six positions (Goldcorp Inc., Hartford Financial Services, iShares MSCI China ETF, iShares Emerging Markets ETF, Market Vectors Russia ETF, and Morgan Stanley) expired out-of-the-money. Decisions will be made to either sell these equities, or to keep them and sell calls to establish August 2012 covered call positions. The related transactions will be made this week and the actual transactions will be posted on this blog site on the same day they occur.

- Two positions (Apple Inc. and Halliburton Corp.) were in-the-money upon Jul2012 options expiration. These equities were assigned (i.e. equities called away).

The annualized return-on-investment financial results for these closed positions is:
Apple Inc. = +25.7%
Halliburton Inc. = -3.2%

The detailed transactions history and results for these two positions are as follows:

1. Apple Inc.(AAPL) -- Closed
The transactions history is as follows:
03/19/2012 Bought 100 AAPL shares @ $593.00
03/19/2012 Sold 1 AAPL Apr2012 $620.00 Call Option @ $18.25
Note: the price of AAPL was $595.43 when this call option was sold.
04/22/2012 AAPL Apr2012 Call options expired.
04/25/2012 Sold 1 AAPL May2012 $630.00 Call at $15.50
Note: the price of AAPL was $617.60 when this call option was sold.
05/19/2012 AAPL May2012 Call options expired.
05/31/2012 Sold 1 AAPL Jun2012 $590.00 Call at $8.60
Note: the price of AAPL was $576.56 when this call option was sold.
06/15/2012 Jun2012 option expired.
06/18/2012 Sold 1 AAPL Jul2012 $590.00 Call at $10.90
Note: the price of AAPL was $574.92 when this call option was sold.
7/22/2012 Jul2012 AAPL option exercised.  Stock sold at $590.00

The performance result (including commissions) for this AAPL position was as follows: Stock Purchase Cost: $59,291.05 = ($593.00*100+$8.95 commission)

Net Profit:
(a) Options Income: +$5,337.20
= (100*($18.25+$15.50+$8.60+$10.90) - 4*$9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock assigned at $590.00 at expiration): -$291.05
= ($590.00-$593.00)*100 - $8.95 commissions

Total Net Profit (Stock assigned at $590.00): +$5,046.15
= (+$5,337.20 +$0.00 -$291.05)
Absolute Return (Stock assigned at July2012 options expiration): +8.5%
= +$5,046.15/$59,291.05
Annualized Return: +25.7%
= (+$5,046.15/$59,291.05)*(365/121 days)


2. Halliburton Inc.(HAL) -- Closed
The transactions history was as follows:
03/07/2012 Bought 300 Halliburton Co. Shares @ $34.02
03/08/2012 Sold 3 HAL Mar2012 $35.00 Calls @ $.48
Note: the price of Halliburton was $34.59 today when the calls were sold.
03/18/2012 Mar2012 options expired.
03/19/2012 Sold 3 HAL Apr2012 $35.00 Calls @ $1.18
Note: the price of HAL was $34.90 when these options were sold.
04/22/2012 HAL Apr2012 Call options expired.
04/25/2012 Sold 3 HAL May2012 $35.00 Calls at $.52
Note: the price of HAL was $33.95 when these call options were sold.
05/19/2012 HAL May2012 Call options expired.
05/31/2012 Sold 3 HAL Jun2012 $30.00 Calls at $.93
Note: the price of HAL was $30.04 when these call options were sold.
06/15/2012 Jun2012 options expired.
06/18/2012 Sold 3 HAL Jul2012 $30.00 Calls at $.72
Note: the price of HAL was $29.30 when these call options were sold.
07/22/2012 Jul2012 HAL options exercised. Stock sold at $30.00
Note: the price of HAL was $30.77 at Jul2012 options expiration.

The performance result (including commissions) for this HAL position was as follows: Stock Purchase Cost: $10,214.95 = ($34.02*300+$8.95 commission)

Net Profit:
(a) Options Income: +$1,093.00
= (300*($.48+$1.18+$.52+$.93+$.72) - 5*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock assigned at $30.00 at expiration): -$1,214.95
= ($30.00-$34.02)*300 - $8.95 commissions

Total Net Profit (Stock assigned at $30.00): -$121.95
= (+$1,093.00 +$0.00 -$1,214.95)
Absolute Return (Stock assigned at July2012 options expiration): -1.2%
= -$121.95/$10,214.95
Annualized Return: -3.2%
= (-$121.95/$10,214.95)*(365/137 days)

Friday, July 20, 2012

Roll Out -- Hess Corp.

Today was Jul2012 options expiration. With less than an hour before the market close, the existing covered calls position was rolled out to an Aug2012 covered calls position for the same $45.00 strike price.

The advantage of waiting until this afternoon to roll this position was to extract almost all of the extrinsic value from the short options before establishing the position for the next expiration month. With Hess Corp.(Symbol HES) stock at $45.41, the Jul2012 $45.00 options were in-the-money and the remaining time value in the Jul2012 options was only $.01 [$.42 - ($45.41 - $45.00)]. A credit spread transaction was executed to roll out from the July2012 to the Aug2012 $45.00 strike price as follows:

07/20/2012 Bought-to-Close 2 HES Jul2012 $45.00 Call Options at $.42
07/20/2012 Sell-to-Open 2 HES Aug2012 $45.00 Call Options at $1.95

The transaction history so far in this Hess Corp.(HES) position is as follows: 03/19/2012 Bought 200 HES shares @ $62.572
03/19/2012 Sold 2 HES Apr2012 $65.00 Call Options @ $1.24
Note: the price of HES was $63.24 when these calls were sold.
04/22/2012 Apr2012 HES options expired.
05/01/2012 Sold 2 HES May2012 $55.00 Call Options @ $.74
Note: the price of HES was $53.35 when these options were sold.
05/19/2012 HES Jun2012 Call options expired.
06/04/2012 Sold 2 HES Jun2012 $45.50 Calls at $1.18
06/15/2012 Jun2012 options expired.
06/18/2012 Sold 2 HES Jul2012 $45.00 Calls at $1.20
Note: the price of HES was $43.56 when these options were sold.
07/20/2012 Bought-to-Close 2 HES Jul2012 $45.00 Call Options at $.42
07/20/2012 Sell-to-Open 2 HES Aug2012 $45.00 Call Options at $1.95
Note: the price of HES was $45.41 when this credit spread transaction was executed.

The overall return-on-investment result for this Hess covered calls position will be calculated and presented when the position is closed.

Wednesday, July 18, 2012

Roll Out -- Mylan Inc.

Today, with Mylan Inc.(Symbol MYL) stock at $22.57, the Jul2012 $22.00 options in-the-money, and only 3 days remaining until options expiration, the Covered Calls Advisor rolled out to the Aug2012 $22.00 options.  The remaining time value in the Jul2012 options was only $.03 [$.60 - ($22.57 - $22.00)] today when the following credit spread transaction was executed:
07/18/2012 Bought-to-Close 5 MYL Jul2012 $22.00 Call Options at $.60
07/18/2012 Sell-to-Open 5 MYL Aug2012 $22.00 Call Options at $.96

The transaction history so far in this Mylan (MYL) position is as follows:
03/08/2012 Bought 500 Mylan Inc. Shares @ $22.51
03/08/2012 Sold 5 MYL Mar2012 $23.00 Calls @ $.26
Note: the price of Mylan was $22.75 today when the calls were sold.
03/18/2012 Mar2012 options expired.
03/19/2012 Sold 5 MYL Apr2012 $23.00 Calls @ $.47
Note: the price of MYL was $22.73 when these options were sold.
04/22/2012 MYL May2012 Call options expired.
04/25/2012 Sold 5 MYL May2012 $23.00 Calls at $.30
Note: the price of MYL was $22.20 when these call options were sold.
05/19/2012 MYL Jun2012 Call options expired.
06/04/2012 Sold 5 MYL Jun2012 $21.00 Calls at $.28
06/15/2012 Bought-to-Close 5 Jun2012 $21.00 call options at $.20
06/15/2012 Sold 5 MYL Jul2012 $22.00 call options at $.31
07/18/2012 Bought-to-Close 5 MYL Jul2012 $22.00 call options at $.60
07/18/2012 Sell-to-Open 5 MYL Aug2012 $22.00 call options at $.96
Note: the price of MYL was $22.57 when this credit spread roll-out transaction was made.

A possible result from this position is as follows:
Stock Purchase Cost: $11,263.95
= ($22.51*500+$8.95 commission)

Net Profit:
(a) Options Income: +$822.80
= ($.26+$.47+$.30+$.28-$.20+$.31-$.60+$.96)*500 shares) - 6*$11.20 commissions
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock price above $22.00 at Aug2012 options expiration):
-$263.95 = ($22.00-$22.51)*500 - $8.95 commissions

Total Net Profit(If stock price above $22.00 at Aug2012 options expiration): +$558.85
= (+$822.80 +$0.00 -$263.95)

Absolute Return (If Mylan stock price above $22.00 at Aug2012 options expiration): +5.0% = +$558.85/$11,263.95
Annualized Return (If stock price above $22.00 at expiration): +11.1%
= (+$558.85/$11,263.95)*(365/163 days)

Tuesday, July 17, 2012

Roll Out -- Valero Energy Corp

Today, with the Valero Jul2012 $24.00 options well in-the-money and a remaining time value of only $.04 [$1.50 - ($25.46-$24.00)], it was decided to roll out the covered calls position to the Aug2012 $24.00 strike price.

The transaction history so far in this Valero (VLO) position is as follows:
06/21/2012 Bought 300 VLO @ $22.82
06/21/2012 Sold 3 VLO Jul2012 $24.00 Calls @ $.46
07/17/2012 Bought-to-Close 3 VLO Jul2012 $24.00 Calls @ $1.50
07/17/2012 Sold-to-Open 3 VLO Aug2012 $24.00 Calls @ $1.95

A possible result from this position is as follows:
Stock Purchase Cost: $6,854.95
= ($22.82*300+$8.95 commission)

Net Profit:
(a) Options Income: +$242.40
= ($.46-$1.50+$1.95)*300 shares) - 3*$11.20 commissions
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock price above $24.00 at Aug2012 options expiration):
+$345.05 = ($24.00-$22.82)*300 - $8.95 commissions

Total Net Profit(If stock price above $24.00 at Aug2012 options expiration): +$587.45
= (+$242.40 +$0.00 +$345.05)

Absolute Return (If Valero stock price above $24.00 at Aug2012 options expiration): +8.6% = +$587.45/$6,854.95

Annualized Return (If stock price above $24.00 at expiration): +53.9%
= (+$587.45/$6,854.95)*(365/58 days)

Saturday, July 14, 2012

Overall Market Meter Remains "Slightly Bullish"

Each month during options expiration week, the Covered Calls Advisor recalculates the current values for each of the eight factors used to determine the "Overall Market Meter" rating. This month, the Overall Market Meter rating remains unchanged at Slightly Bullish.

The eight factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next three indicators), and
- growth (the last indicator).






















The current Market Meter Average of 3.75 (see blue line in chart above) is slightly below the 3.88 of last month. The 3.75 is a Slightly Bullish rating (range from 3.51 to 4.50). Seven of the eight factors used to determine the Overall Market Meter rating were unchanged from the prior analysis last month. The one factor that changed was Total Market Index-to-GDP Ratio which changed from Neutral to Slightly Bearish.

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bullish sentiment is to "on-average sell 2% out-of-the-money covered calls for the nearest expiration month." So with the July 2012 options expiration at the end of this week, newly established positions for August 2012 expiration will be established in accordance with this guideline.

Your comments or questions regarding this post (or the details related to any of the eight factors used in this model) are welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Jeff