Wednesday, October 1, 2014

Established Goldcorp Inc. Covered Calls

Yesterday, a new covered calls position was established in Goldcorp Inc. (Ticker Symbol GG) with a Nov2014  options expiration date. 

The Covered Calls Advisor believes that gold miners are very attractive investments based on their potential for earnings recoveries over the next year.  Also from a technical viewpoint, they are very oversold and are likely bottoming near current prices.  Moreover, with likely ongoing quantitative easing monetary policies of central banks worldwide, gold will continue to be an attractive alternative investment.  Gold mining stocks are likely to move significantly higher in the months ahead. 

As detailed below, this investment will provide a +5.0% absolute return in 54 days (which is equivalent to a +33.9% annualized return) if Goldcorp stock closes at or above the $23.00 strike price at options expiration on November 21st.

1. Goldcorp Inc.(GG) -- New Covered Calls Position

The transactions were as follows:
09/30/2014 Bought 300 GG shares @ $22.959
09/30/2013 Sold 3 GG Nov2014 $23.00 Call Options @ $1.13
Note: the price of GG was $23.04 when these options were sold.

Two possible overall performance results (including commissions) for this Goldcorp Inc. (GG) covered calls position is as follows:
Stock Purchase Cost: $6,896.65
= ($22.959*300+$8.95 commission)

Net Profit:
(a) Options Income: +$327.80
= 300*$1.13 - $11.20 commissions
(b) Dividend Income: +$15.00 = $.05 * 300 (monthly dividend)
(c) Capital Appreciation (If GG price unchanged at $22.959 at options expiration in Nov2014): -$8.95
= ($22.959-$22.959)*300 - $8.95 commissions; or
(c) Capital Appreciation (If GG assigned at $23.00 at Nov2014 options expiration): +$3.35
= ($23.00-$22.959)*300 - $8.95 commissions

1. Total Net Profit (If GG unchanged at $22.959 at options expiration in Nov2014): +$333.85
= (+$327.80 +$15.00 -$8.95); or
2. Total Net Profit (If GG assigned at $23.00): +$346.15
= (+$327.80 +$15.00 +$3.35)

Two possible overall return-on-investments are:
1. Absolute Return (if GG price unchanged at $22.959 at Nov2014 expiration:): +4.8%
= +$333.85/$6,896.65
Annualized Return If Unchanged (ARIU): +32.7%
= (+$333.85/$6,896.65)*(365/54 days); or

2. Absolute Return if Assigned (at $23.00): +5.0%
= +$346.15/$6,896.65
Annualized Return If Assigned (ARIA): +33.9%
= (+$346.15/$6,896.65)*(365/54 days)

The downside 'breakeven price' at expiration is at $21.87 ($23.00 - $1.13), which is 4.7% below the current market price of $22.959.
The 'crossover price' at expiration is $24.089 ($22.959 + $1.13). This is the price above which it would have been more profitable to simply buy-and-hold Goldcorp stock until Nov 21st (the Nov2014 options expiration date) rather than establish this covered calls position.