Today, a new covered calls position was established in General Motors Co. (ticker symbol GM). Three hundred shares of GM were purchased at $34.31 and three in-the-money Jan2016 Call options were sold at the $33.00 strike price for $1.66 each.
As shown below, this investment will provide a +0.8% absolute
return in 19 days (which is equivalent to a +16.2% annualized return) if
GM stock remains above the $33.00 strike price on the January 15th options expiration
This potential return-on-investment result is attractive to us option sellers given this conservative investment -- there is 3.8% downside protection (from the current $34.31 stock price to the $33.00 strike price). The implied volatility in the options was approximately 28 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. General Motors Co. (GM) -- New Covered Calls Position
The transactions were as follows:
12/28/2015 Bought 300 General Motors Co. shares @ $34.31
12/28/2015 Sold 3 GM Jan2016 $33.00 Call options @ $1.66
Note: the stock purchase and the sale of these call options was done as a simultaneous buy/write transaction.
A possible overall performance result (including commissions) would be as follows:
Bought 300 shares GM: $10,300.95
= $34.31*300 + $7.95 commission
(a) Options Income: +$487.80
= ($1.66*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GM is above $33.00 strike price at Jan2016 expiration): -$400.95
= ($33.00-$34.31)*300 shares - $7.95 commissions
Total Net Profit (If GM is above $33.00 strike price at Jan2016 options expiration): +$86.85
= (+$487.80 options income +$0.00 dividend income -$400.95 capital appreciation)
Absolute Return (If GM is above $33.00 strike price at Jan2016 options expiration): +0.8%
Annualized Return (If GM stock is above $33.00 at expiration): +16.2%
= (+$86.85/$10,300.95)*(365/19 days)
The downside 'breakeven price' at expiration is at $32.65 ($34.31 -$1.66), which is 5.1% below the current market price of $34.31.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Jan 15th, 2016 options expiration) for
this GM position is 72%. This compares with a
profit of 50.2% for a buy-and-hold of General Motors stock over the same
Using this probability of profit of 72%, the Expected Value annualized
ROI of this investment (if held until expiration) is +11.7% (+16.2% *
The 'crossover price' at expiration is $35.97 ($34.31 + $1.66). This is the price above which it would have been more profitable to simply buy-and-hold GM stock until January 15th (the Jan2016 options expiration date) rather than establishing this covered calls position.