Thursday, October 24, 2013

Established Covered Calls Position in Aetna Inc.

Today, a new covered calls position was established in Aetna Inc.  (Ticker Symbol AET).  This AET position was established at the $60.00 strike price and with a Nov2013 expiration. As detailed below, this investment will provide a +1.6% absolute return in 24 days (which is equivalent to a +24.0% annualized return) if the stock closes at or above $60.00 at options expiration on Nov 15th.  The current Greek value of Delta for this option of 65.6% provides a good estimate of the probability that the stock price will be above the $60.00 strike price at Nov2013 options expiration. Thus, the resulting expected value of the annualized ROI for this investment is +15.7% = (+24.0% x 65.6%).

The details of the associated transactions and a potential return-on-investment result are as follows:

Aetna Inc.(AET)
The transactions were as follows:
10/24/2013 Bought 300 AET shares @ $61.61
10/24/2013 Sold 3 AET Nov2013 $60.00 Call Options @ $2.65

A possible overall performance result (including commissions) for these Aetna Inc. covered calls is as follows:
Stock Purchase Cost: $18,491.95
= ($61.61*300+$8.95 commission)

Net Profit:
(a) Options Income: +$783.80
= 300*$2.65 - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AET assigned at $60.00) = -$491.95
= ($60.00-$61.61)*300 - $8.95 commissions

Total Net Profit (If AET assigned at $60.00): +$291.85
= (+$783.80 +$0.00 -$491.95)

Absolute Return if Assigned (at $60.00): +1.6%
= +$291.85/$18,491.95
Annualized Return If Assigned (ARIA): +24.0%
= (+$291.85/$18,491.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $58.96 ($61.61 - $2.65), which is 4.3% below the current market price of $61.61.

The 'crossover price' at expiration is $62.65 ($60.00 + $2.65). This is the price above which it would have been more profitable to simply buy-and-hold Aetna until November 15th (the Nov2013 options expiration date) rather than establishing this covered calls position.