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Thursday, September 3, 2015

A Second Covered Calls Position Established in General Motors Co.

This past Tuesday, a second covered calls position was established in General Motors Co. (ticker symbol GM) with a Sept2015 expiration.  The prior position was established at the $30.00 strike price.  For this position, 300 shares of General Motors stock was purchased at $28.77 and three Sep2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $28.00 strike price for $1.32 each.

This covered calls investment is a strategic one that anticipated a regular quarterly dividend announcement of $.36.  The Board of Directors made this announcement yesterday and the ex-div date is Sept 10th (i.e. prior to the September 18th options expiration date).  Now that the quarterly dividend announcement has been made, it is likely that many investors will purchase the stock beginning today (and for the next few days) to position themselves to receive this generous dividend payment (equivalent to a very attractive 5% annualized dividend yield).  This buying will send the stock price higher and increase the likelihood that the Covered Calls Advisor's desired outcome for this covered calls position, namely being assigned at the  $28.00 strike price, will be achieved.  Details of this position are provided below.

General Motors Co (GM) Covered Calls Position
Based on GM's announcement yesterday, GM stock will go ex-dividend on September 10th.  As shown below, if the current time value (i.e. extrinsic value) of $.55 [$1.32 option premium - ($28.77 stock price - $28.00 strike price)] remaining in the short call options decay substantially below the $.36 dividend amount by September 9th (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:
If Early Assignment: +1.7% absolute return (equivalent to +68.0% annualized return for the next 9 days) if the stock is assigned early (the day prior to Sept 10th ex-div date); OR
If Dividend Capture: +2.9% absolute return (equivalent to +56.2% annualized return over the next 19 days) if the stock is assigned at Sep2015 expiration on Sept 18th.

09/01/2015 Bought 300 GM shares @ $28.77
09/01/2015 Sold 3 GM Sep2015 $28.00 Call options @ $1.32
09/10/2015 Upcoming ex-dividend of $.36 per share

Two possible overall performance results (including commissions) for this General Motors (GM) covered calls position are as follows:
Stock Purchase Cost: $8,639.95
= ($28.77*300+$8.95 commission)

Net Profit:
(a) Options Income: +$384.80
= ($1.32*300 shares) - $11.20 commissions
(b) Dividend Income (If option exercised early on day prior to Sept 10th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Sep2015 expiration): +$108.00
= ($.36 dividend per share x 300 shares)
(c) Capital Appreciation (If stock assigned early on Sept 9th): -$239.95
+($28.00-$28.77)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $28.00 at Sep2015 expiration): -$239.95
+($28.00-$28.77)*300 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Sept 10th ex-div date): +$144.85
= (+$384.80 options income +$0.00 dividend income -$239.95 capital appreciation); or
Total Net Profit (If stock assigned at $28.00 strike price at Sep2015 expiration): +$252.85
= (+$384.80 options income +$108.00 dividend income -$239.95 capital appreciation)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.7%
= +$144.85/$8,639.95
Annualized Return (If option exercised early): +68.0%
= (+$144.85/$8,639.95)*(365/9 days); or

2. Absolute Return (If stock assigned at $28.00 at Sep2015 expiration): +2.9%
= +$252.85/$8,639.95
Annualized Return (If stock assigned): +56.2%
= (+$252.85/$8,639.95)*(365/19 days)

Either outcome would provide an outstanding return on investment.  These returns will be achieved as long as the stock is above the $28.00 strike price upon the Sep2015 options expiration.