Wednesday, September 26, 2012

Established Halliburton Co. Covered Calls

Today, a new covered calls position was established in Halliburton Co. (ticker symbol HAL) with an Oct2012 expiration and at the $33.00 strike price. The transactions are as follows:
09/26/2012 Bought 700 HAL shares @ $33.819
09/26/2012 Sold 7 HAL Oct2012 $33.00 Call Options @ $1.65
Note: the price of HAL shares was $33.85 today when these options were sold.

A possible overall performance result (including commissions) for this Halliburton Co. (HAL) covered calls position is as follows:
Stock Purchase Cost: $23,682.25
= ($33.819*700+$8.95 commission)

Net Profit:
(a) Options Income: +$1,140.80
= ($1.65 X 700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HAL assigned at $33.00 upon expiration): -$582.25
=+($33.00-$33.819)*700 - $8.95 commissions

Total Net Profit (If HAL assigned at $33.00 at Oct2012 expiration): +$558.55
= (+$1,140.80 +$0.00 -$582.25)

Absolute Return (If HAL assigned at $33.00 at Oct2012 expiration): +2.4%
= +$558.55/$23,682.25
Annualized Return (If stock assigned): +34.4%
= (+$558.55/$23,682.25)*(365/25 days)

The downside 'breakeven price' at expiration is at $32.17 ($33.82 - $1.65).  Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held 25 days until Oct2012 options expiration) for this Halliburton Co. covered calls position is 73.4%. This compares with a probability of profit of 51.4% for a buy-and-hold of HAL over the same time period.

The 'crossover price' at expiration is $34.65 ($33.00 + $1.65).  This is the price above which it would have been more profitable to simply buy-and-hold HAL stock until October 20, 2012 (the Oct2012 options expiration date) rather than establishing the covered calls position. The probability of exceeding this crossover price at expiration is 40.0%.