Monday, October 22, 2012

Established Foot Locker Inc. Covered Calls

Today, a new covered calls position was established in Foot Locker Inc. (ticker symbol FL) with a Nov2012 expiration and at the $35.00 strike price. The transactions are as follows:
10/22/2012 Bought 300 FL shares @ $35.48
10/22/2012 Sold 3 FL Nov2012 $35.00 Call Options @ $1.45
Note: the price of FL shares was $35.55 today when these options were sold.

A possible overall performance result (including commissions) for this Foot Locker Inc. (FL) covered calls position is as follows:
Stock Purchase Cost: $10,635.05
= ($35.48*300+$8.95 commission)

Net Profit:
(a) Options Income: +$423.80
= ($1.45 X 300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FL assigned at $35.00 upon expiration): -$152.95
=+($35.00-$35.48)*300 - $8.95 commissions

Total Net Profit (If FL assigned at $35.00 at Nov2012 expiration): +$270.85
= (+$423.80 +$0.00 -$152.95)

Absolute Return (If FL assigned at $35.00 at Nov2012 expiration): +2.5%
= +$270.85/$10,635.05
Annualized Return (If stock assigned): +34.4%
= (+$270.85/$10,635.05)*(365/27 days)

The downside 'breakeven price' at expiration is at $34.03 ($35.48 - $1.45).  Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held 27 days until Nov2012 options expiration) for this Foot Locker Inc. covered calls position is 69.5%. This compares with a probability of profit of 51.0% for a buy-and-hold of FL over the same time period.

The 'crossover price' at expiration is $36.45 ($35.00 + $1.45).  This is the price above which it would have been more profitable to simply buy-and-hold FL stock until November 16, 2012 (the Nov2012 options expiration date) rather than establishing the covered calls position. The probability of exceeding this crossover price at expiration is 38.6%.

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