Monday, October 22, 2012
Established Foot Locker Inc. Covered Calls
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)
(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%
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%.