Today, positions were established in iShares China Large-Cap ETF (ticker symbol FXI) and Cal-Maine Foods Inc. (CALM). FXI is a covered calls position with a Jan2016 expiration that explicitly considers the potential for capturing the upcoming semi-annual ex-distribution expected on Dec 18th. For Cal-Maine, Dec2015 100% cash-secured Put options were sold (in lieu of a comparable covered calls position) since the implied volatility of the Puts exceeded that of the Calls (thus providing a higher potential return-on-investment result). Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for both positions (with the strike prices below the stock prices when the positions were established).
As detailed below, the potential returns are:
1. iShares China Large-Cap ETF: +2.3% absolute
return in 46 days (equivalent to a +18.1% annualized
2. Cal-Maine Foods Inc.: +2.3% absolute
return in 18 days (equivalent to a +47.6% annualized
Note: the Implied Volatility (IV) of
the options at the time they were sold was 25 for iShares China Large-Cap ETF and 43 for Cal-Maine Foods Inc., so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.
1. iShares China Large-Cap ETF (FXI) -- New Covered Call Position
As shown below, two potential return-on-investment results for this position are:
If Dividend Capture: +2.3% absolute return (equivalent to +18.1% annualized return over the next 46 days) if the stock is assigned at Jan2016 expiration on January 15th.
The transactions were:
12/01/2015 Bought 300 FXI shares @ $37.60
12/01/2015 Sold 3 FXI Jan2016 $36.00 Call options @ $2.02
Note: a simultaneous buy/write transaction was executed.
12/18/2015 Upcoming semi-annual distribution estimated at $.50 per share
Two possible overall performance results (including commissions) for this FXI covered calls position are as follows:
Stock Purchase Cost: $11,287.95
= ($37.60*300+$7.95 commission)
(a) Options Income: +$595.80
= ($2.02*300 shares) - $10.20 commissions
(b) Distribution Income (If option exercised early on business day prior to Dec 18th ex-distribution date): +$0.00; or
(b) Distribution Income (If FXI assigned at Jan2016 expiration): +$150.00
= ($.50 dividend per share x 300 shares)
In this instance, early assignment provides a slightly annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment result for this investment. These returns will be achieved as long as the stock is above the $36.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $35.58 ($37.60 -$2.02) provides a substantial 5.4% downside protection below today's purchase price.
2. Cal-Maine Foods Inc. (CALM) -- New 100% Cash-Secured Puts Position
12/01/2015 Sold 4 CALM Dec2015 $50.00 100% cash-secured Put options @ $1.20
Note: the price of CALM was $52.10 today when this transaction was executed.
The Covered Calls Advisor does not use margin, so the detailed
information on this position and a potential result shown below
reflect the fact that this position was established using 100% cash
securitization for the Put options sold.
This morning there was some aggressive selling of Cal-Maine stock in reaction (this advisor believes it is an over-reaction) to some BB&T commentary about pricing softness in the current quarter for shell eggs (Cal-Maine is the leading U.S. producer). The Covered Calls Advisor has been analyzing Cal-Maine for several weeks and decided to use today's price weakness accompanied by an increase in CALM's implied volatility to 43 for the Dec2015 $50.00 Puts as an opportunity to enter this position in Cal-Maine.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,000.00
Note: the price of Cal-Maine was $52.10 when these options were sold
(a) Options Income: +$469.05
= ($1.20*400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CALM is above $50.00 strike price at Dec2015 expiration): +$0.00
= ($50.00-$50.00)*400 shares
Total Net Profit (If CALM is above $50.00 strike price at Dec2015 options expiration): +$469.05
= (+$469.05 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If CALM is above $50.00 strike price at Dec2015 options expiration): +2.3%
Annualized Return: +47.6%
= (+$469.05/$20,000.00)*(365/18 days)
downside 'breakeven price' at expiration is at $48.80 ($50.00 - $1.20),
which is 6.3% below the current market price of $52.10.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Dec 18th, 2015 options expiration) for
this Cal-Maine short Puts position is 65%. This compares with a
profit of 50.2% for a buy-and-hold of Cal-Maine stock over the same
Using this probability of profit of 65%, the expected value annualized return-on-investment (if held until expiration) is +30.9% (+47.60% *
65%), a very attractive risk/reward profile for this conservative investment.
'crossover price' at expiration is $53.30 ($52.10 + $1.20). This is the
price above which it would have been more profitable to simply
buy-and-hold CALM until the Dec2015 options expiration date
rather than selling these Put options.