Today, a new covered calls position was established in MetLife Inc. (ticker symbol MET). Three hundred shares of MET were purchased at $48.43 and three in-the-money Dec2015 Call options were simultaneously sold at the $47.50 strike price for $1.51 each.
As shown below, this investment will provide a +1.1% absolute
return in 10 days (which is equivalent to a +39.1% annualized return) if
MetlLife stock remains above the $47.50 strike price on the December 18th options expiration
This potential return-on-investment result is attractive to us option sellers given this conservative investment -- there is 1.9% downside protection (from the current $48.43 stock price to the $47.50 strike price). The implied volatility in the options was approximately 31 when this position was established and there are no quarterly earnings or ex-dividends prior to the expiration date at the end of next week.
The details of the associated transactions and a potential return-on-investment result are as follows:
1. MetLife Inc. (MET)
The transactions were as follows:
12/09/2015 Bought 300 MetLife Inc. @ $48.43
12/09/2015 Sold 3 MET Dec2015 $47.50 Call Options @ $1.51
A possible overall performance result (including commissions) for these MetLife Inc. covered calls is as follows:
Stock Purchase Cost: $14,536.95
= ($48.43*300+$7.95 commission)
(a) Options Income: +$442.80
= 300*$1.51 - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MET assigned at $47.50) = -$286.95
= ($47.50-$48.43)*300 - $7.95 commissions
Total Net Profit (If MET assigned at $47.50): +$155.85
= (+$442.80 +$0.00 -$286.95)
Absolute Return if Assigned (at $47.50 strike price): +1.1%
Annualized Return If Assigned (ARIA): +39.1%
= (+$155.85/$14,536.95)*(365/10 days)
The downside 'breakeven price' at expiration is at $46.92 ($48.43 - $1.51), which is 3.1% below the current market price of $48.43.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing calculator, the resulting probability of
making a profit (if held until Dec2015 options expiration) for this MetLife covered calls position is 65%. This compares with a probability of
profit of 50.2% for a buy-and-hold of MET stock over the same time period.
Using this probability of profit of 65%, the Expected Value annualized
ROI of this investment (if held until expiration) is +25.4% (+39.1% * 65%).
The 'crossover price' at expiration is $49.94 ($48.43 + $1.51). This is the price above which it would have been more profitable to simply buy-and-hold MetLife stock until Decmber 18th (the Dec2015 options expiration date) rather than establish this covered calls position.