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Thursday, December 10, 2015

Established Covered Calls Position in Paccar Inc.

Today, a covered calls position was established in Paccar Inc. (ticker symbol PCAR) with a Jan2016 expiration.  This position includes consideration of an upcoming special dividend with an ex-div date of Dec 16th.  A generous $1.40 special dividend is being provided because of the positive year-to-year sales trend in Paccar's two primary markets (U.S. and Europe).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established (with the strike price of $45.00 being below the stock purchase price of $48.97).

As detailed below, two potential return-on-investment results for this position are:
If Early Assignment: +0.8% absolute return (equivalent to +51.3% annualized return for the next 6 days) if the stock is assigned early (business day prior to Dec 16 ex-date); OR
If Dividend Capture: +3.7% absolute return (equivalent to +36.5% annualized return over the next 37 days) if the stock is assigned at Jan2016 expiration on January 15th.

1. Paccar Inc. (PCAR) -- New Covered Calls Position
The $1.40 special dividend of Dec 16th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.50 [$4.47 option premium - ($48.97 stock price - $45.00 strike price)] remaining in the short call option decays substantially by December 15th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the PCAR shares away to capture the dividend.

The transactions were:
12/10/2015 Bought 200 PCAR shares @ $48.97
12/10/2015 Sold 2 PCAR Jan2016 $45.00 Call options @ $4.47
Note: a simultaneous buy/write transaction was executed.
12/16/2015 Upcoming special dividend of $1.40 per share

Two possible overall performance results (including commissions) for this PCAR covered calls position are as follows:
Stock Purchase Cost: $9,801.95
= ($48.97*200+$7.95 commission)

Net Profit:
(a) Options Income: +$884.55
= ($4.47*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Dec 16th ex-dividend date): +$0.00; or
(b) Dividend Income (If PCAR assigned at Jan2016 expiration): +$280.00
= ($1.40 dividend per share x 200 shares)
(c) Capital Appreciation (If PCAR assigned early on Dec 15th): -$801.95
+($45.00-$48.97)*200 - $7.95 commissions; or
(c) Capital Appreciation (If PCAR assigned at $45.00 at Jan2016 expiration): -$801.95
+($45.00-$48.97)*200 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 16 ex-div date): +$82.60
= (+$884.55 +$0.00 -$801.95); or
Total Net Profit (If PCAR assigned at $45.00 at Jan2016 expiration): +$362.60
= (+$884.55 +$280.00 -$801.95)

1. Absolute Return [If option exercised on Dec 15th (business day prior to ex-dividend date)]: +0.8%
= +$82.60/$9,801.95
Annualized Return (If option exercised early): +51.3%
= (+$82.60/$9,801.95)*(365/6 days); OR

2. Absolute Return (If PCAR assigned at $45.00 at Jan2016 expiration): +3.7%
= +$362.60/$9,801.95
Annualized Return: +36.5%
= (+$362.60/$9,801.95)*(365/37 days)

Either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $45.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $44.50 ($48.97 -$4.47) provides 9.1% downside protection below today's purchase price.