Friday, November 27, 2015

Established Covered Calls Position in Kinder Morgan Inc.

Today, a new covered calls position was established in Kinder Morgan Inc. (ticker symbol KMI).  Three hundred shares of KMI were purchased at $23.95 and three in-the-money Dec2015 Call options were simultaneously sold at the $22.50 strike price for $1.80 each.

Kinder Morgan is the largest energy transportation company in the oil and gas midstream industry.  Share prices in midstream companies have been crushed recently.  The Covered Calls Advisor believes that KMI is a terrific bargain at the $22.50 strike price given the huge dividend yield at that price level.

As shown below, this investment will provide a +1.2% absolute return in 22 days (which is equivalent to a +20.0% annualized return) if KMI remains above the $22.50 strike price on the December 18th options expiration date.

This potential return-on-investment result is attractive to us option sellers given this relatively conservative investment -- there is 6.1% downside protection (from the current $23.95 stock price to the $22.50 strike price).  The implied volatility in the options was approximately 43 when this position was established and there are no quarterly earnings or distributions prior to the December options expiration date. 

The details of the associated transactions and a potential return-on-investment result are as follows:

1. Kinder Morgan Inc. (KMI)
The transactions were as follows:
11/27/2015 Bought 300 Kinder Morgan shares @ $23.95
11/27/2015 Sold 3 KMI Dec2015 $22.50 Call Options @ $1.80

A possible overall performance result (including commissions) for these Kinder Morgan Inc. covered calls is as follows:
Stock Purchase Cost: $7,192.95
= ($23.95*300+$7.95 commission)

Net Profit:
(a) Options Income: +$529.80
= 300*$1.80 - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If KMI assigned at $22.50) = -$442.95
= ($22.50-$23.95)*300 - $7.95 commissions

Total Net Profit (If KMI assigned at $22.50): +$86.85
= (+$529.80 +$0.00 -$442.95)

Absolute Return if Assigned (at $22.50 strike price): +1.2%
= +$86.85/$7,192.95
Annualized Return If Assigned (ARIA): +20.0%
= (+$86.85/$7,192.95)*(365/22 days)

The downside 'breakeven price' at expiration is at $22.15 ($23.95 - $1.80), which is 7.5% below the current market price of $23.95.

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 Kinder Morgan covered calls position is 72%. This compares with a probability of profit of 50.4% for a buy-and-hold of KMI stock over the same time period. Using this probability of profit of 72%, the Expected Value annualized ROI of this investment (if held until expiration) is +14.4% (+22.8% * 72%).

The 'crossover price' at expiration is $25.75 ($23.95 + $1.80). This is the price above which it would have been more profitable to simply buy-and-hold Kinder Morgan stock until Decmber 18th (the Dec2015 options expiration date) rather than establish this covered calls position.

Tuesday, November 24, 2015

Established Four New Positions

Today, positions were established in Avis Budget Group Inc. (ticker symbol CAR), Goldman Sachs Group Inc. (GS), Nationstar Mortgage Holdings Inc. (NSM), and Polaris Industries Inc. (PII).  All positions were established for the December 2015 options expiration.  Goldman Sachs and Polaris Industries both have ex-dividends in the upcoming week, so covered call positions were established to most likely enable those dividends to be captured.  For the other two positions, Avis Budget Group and Nationstar Mortgage, 100% cash-secured Put options were sold.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for each of the four positions with the strike prices below the current stock prices.

The potential returns are:
1. Avis Budget Group Inc.: +2.6% absolute return in 25 days (which is equivalent to a +37.5% annualized return-on-investment) if CAR stock closes above the $37.50 strike price on the Dec2015 options expiration date.  
2. Goldman Sachs Group Inc.: +1.2% absolute return in 25 days (equivalent to a +16.8% annualized return-on-investment)
3. Nationstar Mortgage Holdings Inc.:  +3.1% absolute return in 25 days (equivalent to a +45.0% annualized return-on-investment)
4. Polaris Industries Inc.: +1.7% absolute return in 25 days (equivalent to a +24.5% annualized return-on-investment)
Note: the Implied Volatility of the options at the time they were sold (for these four positions) ranged between 23 and 51, so each option exceeded the Covered Calls Advisor's minimum threshold of 20 and thus provides a sufficiently attractive return-on-investment potential relative to the conservative risk profile of each position.  

The transactions and potential return-on-investment results for each position are detailed below.

1. Avis Budget Group Inc. (CAR) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
11/24/2015  Sold 3 CAR Dec2015 $37.50 100% cash-secured Put options @ $1.00
Note: the price of CAR was $38.95 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.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $11,250.00
= $37.50*300
Note: the price of CAR was $38.95 when these options were sold

Net Profit:
(a) Options Income: +$288.80
= ($1.00*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CAR is above $37.50 strike price at Dec2015 expiration): +$0.00
= ($37.50-$37.50)*300 shares

Total Net Profit (If CAR is above $37.50 strike price at Dec2015 options expiration): +$288.80
= (+$288.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If CAR is above $37.50 strike price at Dec2015 options expiration): +2.6%
= +$288.80/$11,250.00
Annualized Return: +37.5%
= (+$288.80/$11,250.00)*(365/25 days)

The downside 'breakeven price' at expiration is at $36.50 ($37.50 - $1.00), which is 6.3% below the current market price of $38.95.
The 'crossover price' at expiration is $39.95 ($38.95 + $1.00).  This is the price above which it would have been more profitable to simply buy-and-hold CAR until Dec 18th (the Dec2015 options expiration date) rather than selling these Put options.


2. Goldman Sachs Group Inc. (GS) -- New Covered Call Position
A $.65 quarterly dividend goes ex-dividend on November 30th.  Although very unlikely, if the current time value (i.e. extrinsic value) of $1.69 [$8.75 option premium - ($187.06 stock price - $180.00 strike price)] remaining in the short call option decays below the $.65 dividend amount by November 27th (this Friday -- the business day prior to the ex-div date), then there is a possibility (although very unlikely) that the call option owner would exercise early and call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:
If Early Assignment: +0.8% absolute return (equivalent to +97.7% annualized return for the next 3 days) if the stock is assigned early (business day prior to Nov 30th ex-div date); OR
If Dividend Capture: +1.2% absolute return (equivalent to +16.8% annualized return over the next 25 days) if the stock is assigned at Dec2015 expiration on December 18th.

11/24/2015 Bought 100 GS shares @ $187.06
11/24/2015 Sold 1 GS Dec2015 $180.00 Call option @ $8.75
Note: the price of GS was $187.21 when the option was sold
11/30/2015 Upcoming ex-dividend of $.65 per share

Two possible overall performance results (including commissions) for this Goldman Sachs covered call position are as follows:
Stock Purchase Cost: $18,714.95
= ($187.06*100+$8.95 commission)

Net Profit:
(a) Options Income: +$865.30
= ($8.75*100 shares) - $9.70 commissions
(b) Dividend Income (If option exercised early on business day prior to Nov 30th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Dec2015 expiration): +$65.00
= ($.65 dividend per share x 100 shares)
(c) Capital Appreciation (If stock assigned early on Nov 27th): -$714.95
+($180.00-$187.06)*100 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $180.00 at Dec2015 expiration): -$714.95
+($180.00-$187.06)*100 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Nov 30th ex-div date): +$150.35
= (+$865.30 +$0.00 -$714.95); or
Total Net Profit (If stock assigned at $180.00 at Dec2015 expiration): +$215.35
= (+$865.30 +$65.00 -$714.95)

1. Absolute Return [If option exercised this Friday (business day prior to ex-div date)]: +0.8%
= +$150.35/$18,714.95
Annualized Return (If option exercised early): +97.7%
= (+$150.35/$18,714.95)*(365/3 days); OR

2. Absolute Return (If stock assigned at $180.00 at Dec2015 expiration): +1.2%
= +$215.35/$18,714.95
Annualized Return: +16.8%
= (+$215.35/$18,714.95)*(365/25 days)

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment.  These returns will be achieved as long as the stock is above the $180.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $178.31 ($187.06 -$8.75) provides a substantial 5.0% downside protection from today's purchase price.


3. Nationstar Mortgage Holdings Inc. (NSM) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
11/24/2015  Sold 4 NSM Dec2015 $12.00 100% cash-secured Put options @ $.40
Note: the price of NSM was $12.89 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.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $4,800.00
= $12.00*400
Note: the price of NSM was $12.89 when these options were sold

Net Profit:
(a) Options Income: +$148.05
= ($.40*400 shares) - $11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NSM is above $12.00 strike price at Dec2015 expiration): +$0.00
= ($12.00-$12.00)*400 shares

Total Net Profit (If NSM is above $12.00 strike price at Dec2015 options expiration): +$148.05
= (+$148.05 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If NSM is above $12.00 strike price at Dec2015 options expiration): +3.1%
= +$148.05/$4,800.00
Annualized Return: +45.0%
= (+$148.05/$4,800.00)*(365/25 days)

The downside 'breakeven price' at expiration is at $11.60 ($12.00 - $.40), which is 10.0% below the current market price of $12.89.
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 Nationstar Mortgage short Puts position is 71%. This compares with a probability of profit of 50.3% for a buy-and-hold of Nationstar stock over the same time period. Using this probability of profit of 71%, the expected value annualized return-on-investment (if held until expiration) is +31.9% (+45.0% * 71%).
The 'crossover price' at expiration is $13.29 ($12.89 + $.40).  This is the price above which it would have been more profitable to simply buy-and-hold NSM until Dec 18th (the Dec2015 options expiration date) rather than selling these Put options.


4. Polaris Industries Inc. (PII) -- New Covered Call Position
A $.53 quarterly dividend goes ex-dividend on November 27th (this Friday).  Including this dividend, the potential absolute return for this investment is +1.7% (equivalent to +24.5% annualized return over the next 25 days) if the stock is assigned at the Dec2015 options expiration on December 18th.

11/24/2015 Bought 100 PII shares @ $103.92
11/24/2015 Sold 1 PII Dec2015 $100.00 Call option @ $5.32
11/27/2015 Upcoming ex-dividend of $.53 per share

A possible overall performance result (including commissions) for this Polaris covered call position is as follows:
Stock Purchase Cost: $10,400.95
= ($103.92*100+$8.95 commission)

Net Profit:
(a) Options Income: +$522.30
= ($5.32*100 shares) - $9.70 commissions
(b) Dividend Income (If stock assigned at Dec2015 expiration): +$53.00
= ($.53 dividend per share x 100 shares)
(c) Capital Appreciation (If stock assigned at $100.00 strike price at Dec2015 expiration): -$400.95
+($100.00-$103.92)*100 - $8.95 commissions

Total Net Profit (If stock assigned at $100.00 at Dec2015 expiration): +$174.35
= (+$522.30 +$53.00 -$400.95)

Absolute Return (If stock assigned at $100.00 at Dec2015 expiration): +1.7%
= +$174.35/$10,400.95
Annualized Return: +24.5%
= (+$174.35/$10,400.95)*(365/25 days)

If the stock declines below the strike price, the breakeven price of $98.07 ($103.92 -$5.32 -$.53) provides a substantial 5.6% downside protection from today's purchase price.

Monday, November 23, 2015

Cummins Inc. Position Closed

The Nov2015 covered calls position in Cummins Inc.(ticker CMI) expired upon last Friday's options expiration. Of the seven positions in the Covered Calls Advisor Portfolio with Nov2015 expirations, Cummins was the only one that expired out-of-the-money. Today, the Covered Calls Advisor decided to sell the 200 long shares of CMI. The results of these transactions are detailed below.

1. Cummins Inc. (CMI)- Position Closed
11/09/2015 Bought 200 CMI shares @ $103.97
11/09/2015 Sold 2 CMI Nov2015 $102.00 Call options @ $3.12
11/18/2015 Ex-dividend of $.975 per share
11/20/2015 2 CMI Nov2015 $102 Call options expired
Note: price of CMI was $98.70 upon Nov2015 options expiration
11/23/2015 Sold 200 CMI shares @ $99.27

The overall performance result (including commissions) for this Cummins (CMI) covered calls position was as follows:
Stock Purchase Cost: $20,802.95
= ($103.97*200+$8.95 commission)

Net Profit:
(a) Options Income: +$613.55
= ($3.12*200 shares) - $10.45 commissions

(b) Dividend Income: +$195.00
= ($.975 dividend per share x 200 shares)
(c) Capital Appreciation (Stock sold at $99.27): -$948.95
+($99.27 - $103.97)*200 - $8.95 commissions

Total Net Profit: -$140.40
= (+$613.55 +$195.00 -$948.95)

Absolute Return (If stock assigned at $102.00 at Nov2015 expiration): -0.7%
= -$140.40/$20,802.95
Annualized Return (If stock assigned): -17.6%
= (-$140.40/$20,802.95)*(365/14 days)

Saturday, November 21, 2015

November 2015 Option Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained seven positions with November 2015 expirations.  The results are as follows:

- Six of the seven positions (Capital One Financial Corporation, iShares China Large-Cap ETF, Micron Technology Inc., Time Warner Inc., and two positions in United Continental Holdings Inc.) were closed out at expiration. This was the optimal outcome for these positions in that the maximum potential return-on-investment (ROI) results were achieved for these positions.  The results for these closed positions are:
  • Capital One Financial Corporation = +0.8% absolute return (equivalent to +36.8% annualized return for the 8 days holding period)
  • iShares China Large-Cap ETF = +4.3% absolute return (equivalent to +16.6% annualized return for the 95 days holding period)
  • Micron Technology Inc. = +2.9% absolute return (equivalent to +131.3% annualized return for the 8 days holding period)
  • Time Warner Inc. = +1.6% absolute return (equivalent to +47.9% annualized return for the 12 days holding period)
  • United Continental Holdings Inc. (UAL position #1) = +6.0% absolute return (equivalent to +36.9% annualized return for the 59 days holding period)
  • United Continental Holdings Inc. (UAL position #2) = +3.4% absolute return (equivalent to +34.3% annualized return for the 36 days holding period)
The transactions history and results for each of these positions is detailed below. The cash available from the closing of these positions will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.  Any new positions will be posted on this site on the same day they are established.

- One of the seven positions (Cummins Inc.) ended at expiration with the price of the stock below the strike price, so the options expired and the long shares are now retained in the Covered Calls Advisor Portfolio.  A decision will be made soon to either sell these shares or to establish a covered calls position by selling future Call options against the current long stock holding. When this decision is made and the accompanying transaction is completed, a post will be made on this blog on the same day along with the detailed transactions to-date.

Details of the six closed positions summarized above and the associated return-on-investment results are as follows:

1.  Capital One Financial Corporation (COF) -- Position Closed
The transactions were as follows:
11/13/2015  Sold 3 COF 100% cash-secured $76.00 Put options @ $.65
Note: the price of COF was $77.12 today when this transaction was executed.
11/20/2015 3 Capital One Nov2015 $76.00 Puts expired
Note: the price of COF was $79.46 upon Nov2015 options expiration

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 three Put options sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $22,800.00
= $76.00*300

Net Profit:
(a) Options Income: +$183.80
= ($.65*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (COF was above $76.00 strike price at Nov2015 expiration): +$0.00
= ($76.00-$76.00)*300 shares

Total Net Profit (COF was above $76.00 strike price at Nov2015 options expiration): +$183.80
= (+$183.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +0.8%
= +$183.80/$22,800.00
Annualized Return: +36.8%
= (+$183.80/$22,800.00)*(365/8 days)


2. iShares China Large-Cap ETF (FXI) -- Position Closed
The transactions were as follows:
08/17/2015 Sold 3 iShares China Large-Cap ETF Sep2015 $38.50 Puts @ $.77
Note 1: The price of FXI was $39.75 when this transaction was executed.
Note 2: 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 three Put options sold.
09/18/2015 3 FXI Sep2015 Put options exercised and 300 shares of FXI purchased at $38.50 strike price
Note: the price of FXI was $36.32 upon Sep2015 options expiration
09/21/2015 Sold 3 FXI $38.00 Oct2015 Call options @ $.73
Note: the price of FXI was $36.91 when this transaction was made.
Roll Out on 10/16/2015:
Bought-to-Close 3 FXI $38.00 Oct2015 Call options @ $1.70
and simultaneously
Sold-to-Open 3 FXI $38.00 Nov2015 Call options @ $2.48
Note: the price of FXI was $39.69 when this roll out transaction was executed, so there was only $.01 [$1.70 - ($39.69 - $38.00)] of time value remaining in the Oct2015 Call options when this roll out transaction occurred.
11/20/2015 3 FXI Call options assigned, so the 300 shares of iShares China Large-Cap ETF were sold at the $38.00 strike price
Note: the price of FXI was $38.47 upon the Nov2015 options expiration


The overall performance result (including commissions) for these transactions was as follows:
100% Cash-Secured Cost Basis: $11,550.00
= $38.50*300

Net Profit:
(a) Options Income: +$650.40
= ($.77+$.73-$1.70+$2.48) *300 shares - 3*$11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (FXI was above $38.00 strike price at Nov2015 expiration): -$150.00
= ($38.00-$38.50)*300 shares

Total Net Profit (FXI was above $38.00 strike price upon the Nov2015 options expiration): +$500.40
= (+$650.40 options income +$0.00 dividend income -$150.00 capital appreciation)

Absolute Return achieved: +4.3%
= +$500.40/$11,550.00
Annualized Return: +16.6%
= (+$500.40/$11,550.00)*(365/95 days)


3.  Micron Technology Inc. (MU) -- Position Closed
The transactions were as follows:
11/13//2015  Sold 3 MU 100% cash-secured $15.00 Put options @ $.47
Note: The price of MU was $14.92 when this transaction was executed.
11/20/2015 3 Micron Technology Nov2015 $15.00 Puts expired
Note: the price of MU was $15.43 upon Nov2015 options expiration


The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $4,508.95
= $15.00*300 + $8.95

Net Profit:
(a) Options Income: +$129.80
= ($.47*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (MU was above $15.00 strike price at Nov2015 expiration): +$0.00
= ($17.00-$17.00)*300 shares

Total Net Profit (MU was above $15.00 strike price at Nov2015 options expiration): +$129.80
= (+$129.80 +$0.00 +$0.00)

Absolute Return: +2.9%
= +$129.80/$4,508.95
Annualized Return: +131.3%
= (+$129.80/$4,508.95)*(365/8 days)


4. Time Warner Inc. (TWX) -- Position Closed
The transactions were as follows:
11/09/2015  Sold 3 TWX 100% cash-secured $67.50 Put options @ $1.10
Note: the price of TWX was $68.74 today when this transaction was executed.
11/20/2015 3 Time Warner Inc. Nov2015 $67.50 Puts expired
Note: the price of TWX was $70.72 upon Nov2015 options expiration

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $20,250.00
= $67.50*300

Net Profit:
(a) Options Income: +$318.80
= ($1.10*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (TWX was above $67.50 strike price at Nov2015 expiration): +$0.00
= ($67.50-$67.50)*300 shares

Total Net Profit (TWX was above $67.50 strike price at Nov2015 options expiration): +$318.80
= (+$318.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.6%
= +$318.80/$20,250.00
Annualized Return: +47.9%
= (+$318.80/$20,250.00)*(365/12 days)


5. United Continental Holdings Inc. (UAL) -- 1st UAL Position Closed
The transactions were as follows:
09/22/2015 Sold 3 UAL Oct2015 $57.50 100% cash-secured Put options @ $1.30
Note: the price of UAL was $59.56 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 three Put options sold.
10/16/2015 3 Put options expired with the stock price below the strike price, so 300 shares of UAL were purchased at the $57.50 strike price.
Note: the price of UAL was $55.97 upon options expiration
10/192015 Sold-to-Open 3 UAL Nov2015 $57.50 Call options @ $2.20
Note: the price of UAL was $56.55 when these options were sold
11/20/2015 3 United Continental Nov2015 $57.50 Puts expired
Note: the price of UAL was $58.81 upon Nov2015 options expiration

The overall performance result (including commissions) for this UAL position was as follows:
100% Cash-Secured Cost Basis: $17,250.00
= $57.50*300

 Net Profit:
(a) Options Income: +$1,027.60 = ($1.30 + $2.20)*300 shares) - 2*$11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (UAL was above $57.50 strike price at Nov2015 expiration): +$0.00
= ($57.50-$57.50)*300 shares

Total Net Profit (UAL was above $57.50 strike price at Nov2015 options expiration): +$1,027.60= (+$1,027.60 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +6.0%= +$1,027.60/$17,250.00
Annualized Return: +36.9%
= (+$1,027.60/$17,250.00)*(365/59 days)


6.  United Continental Holdings Inc. (UAL) -- 2nd UAL Position Closed
The transactions were as follows:
10/16/2015  Sold 3 UAL 100% cash-secured $55.00 Put options @ $1.90
Note: the price of UAL was $56.67 today when this transaction was executed.
11/20/2015 3 United Continental Nov2015 $55.00 Puts expired
Note: the price of UAL was $58.81 upon Nov2015 options expiration

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $16,500.00
= $55.00*300

Net Profit:
(a) Options Income: +$558.80
= ($1.90*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (UAL was above $55.00 strike price at Nov2015 expiration): +$0.00
= ($55.00-$55.00)*300 shares

Total Net Profit (UAL was above $55.00 strike price at Nov2015 options expiration): +$558.80
= (+$558.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +3.4%
= +$558.80/$16,500.00
Annualized Return: +34.3%
= (+$558.80/$16,500.00)*(365/36 days)

Friday, November 20, 2015

Overall Market Meter Changes from "Neutral" to "Slightly Bearish"

Today, the Covered Calls Advisor recalculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The result is that the Covered Calls Advisor's current market viewpoint changes from Neutral to Slightly Bearish.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.  Until today, the indicator had remained Neutral throughout 2015.  This proved to be an accurate forecast for the first 11 months this year since the benchmark Russell 3000 Index (ticker symbol IWV) has been neutral so far this year with a net increase of 3.06% (from a closing price of 120.68 on Dec 31, 2014 to 123.74 at today's market close).   

The seven factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).



The current Market Meter average of 2.71 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Slightly Bearish range is from 2.25 to 2.99). 

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bearish sentiment is to "on-average sell 1% in-the-money covered calls for the next options expiration month".

Your comments or questions regarding this post (or the details related to any of the seven factors used in this model) are welcomed. Please email me at the address shown in the upper-right sidebar.

Regards and Godspeed,
Jeff

Thursday, November 19, 2015

Established Covered Calls Position in Devon Energy Corp.

Today, a covered calls positions was established in Devon Energy Corp (ticker symbol DVN) at the $42.50 strike price and with a Dec2015 expiration.  Devon was purchased at $45.325 and the Call options were sold for $4.05. This investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date on December 11th (prior to the Dec 18th options expiration date).  Details of this position is provided below.

1. Devon Energy Corp. (DVN)
A $.24 quarterly dividend goes ex-dividend on December 11th.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.225 [$4.05 option premium - ($45.325 stock price - $42.50 strike price)] remaining in the short call options decay below the $.24 dividend amount by December 10th (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: +2.5% absolute return (equivalent to +41.2% annualized return for the next 22 days) if the stock is assigned early (day prior to Dec 11th ex-div date); OR
If Dividend Capture:  +3.0% absolute return (equivalent to +36.7% annualized return over the next 30 days) if the stock is assigned at Dec2015 expiration on December 18th.

11/19/2015 Bought 200 DVN shares @ $45.325
11/19/2015 Sold 2 DVN Dec2015 $42.50 Call options @ $4.05
12/11/2015 Upcoming ex-dividend of $.24 per share

Two possible overall performance results (including commissions) for this Devon covered calls position are as follows:
Stock Purchase Cost: $9,073.95
= ($45.325*200+$8.95 commission)

Net Profit:
(a) Options Income: +$799.55
= ($4.05*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Dec 11th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Dec2015 expiration): +$48.00
= ($.24 dividend per share x 200 shares); or
(c) Capital Appreciation (If stock assigned early on Dec 10th): -$573.95
+($42.50-$45.325)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $42.50 at Dec2015 expiration): -$573.95
+($42.50-$45.325)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Dec 11th ex-div date): +$225.60
= (+$799.55 +$0.00 -$573.95); or
Total Net Profit (If stock assigned at $42.50 at Dec2015 expiration): +$273.60
= (+$799.55 +$48.00 -$573.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +2.5%
= +$225.60/$9,073.95
Annualized Return (If option exercised early): +41.2%
= (+$225.60/$9,073.95)*(365/22 days); OR

2. Absolute Return (If stock assigned at $42.50 at Dec2015 expiration): +3.0%
= +$273.60/$9,073.95
Annualized Return (If stock assigned): +36.7%
= (+$273.60/$9,073.95)*(365/30 days)

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very attractive return-on-investment.  These returns will be achieved as long as the stock is above the $42.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $41.275 ($45.325 -$4.05) provides a substantial 8.9% downside protection from today's purchase price.

Friday, November 13, 2015

Established New Position in Capital One Financial

Today, the Covered Calls Advisor established a new position in Capital One Financial Corporation (ticker symbol COF) by selling three Nov2015 Put options at the $76.00 strike price. This position is a conservative one since it was established with 1.5% downside protection to the strike price.

As detailed below, the Capital One Financial investment will yield a +0.8% absolute return in 8 days (which is equivalent to a +36.8% annualized return-on-investment) if COF closes above the $76.00 strike price on the Nov2015 options expiration date. 

This potential return is very nice given the downside protection (from the $77.12 stock price to the $76.00 strike price) when the position was established.  The implied volatility in the options was 25 when this position was established; so the $.65 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1.  Capital One Financial Corporation (COF) -- New Position
The transaction was as follows:
11/13/2015  Sold 3 COF 100% cash-secured $76.00 Put options @ $.65
Note: The price of COF was $77.12 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 three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $22,800.00
= $76.00*300

Net Profit:
(a) Options Income: +$183.80
= ($.65*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If COF is above $76.00 strike price at Nov2015 expiration): +$0.00
= ($76.00-$76.00)*300 shares

Total Net Profit (If COF is above $76.00 strike price at Nov2015 options expiration): +$183.80
= (+$183.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If COF is above $76.00 strike price at Nov2015 options expiration): +0.8%
= +$183.80/$22,800.00
Annualized Return: +36.8%
= (+$183.80/$22,800.00)*(365/8 days)

The downside 'breakeven price' at expiration is at $75.35 ($76.00 - $.65), which is 2.3% below the current market price of $77.12.
The 'crossover price' at expiration is $77.77 ($77.12 + $.65).  This is the price above which it would have been more profitable to simply buy-and-hold COF until Nov 20th (the Nov2015 options expiration date) rather than selling these Put options.

Established New Short Put Options Position in Micron Technology Inc.

Today, the Covered Calls Advisor established a new position in Micron Technology Inc. (ticker symbol MU) by selling three Nov2015 Put options at the $15.00 strike price.

As detailed below, the Micron Technology investment will yield a +2.9% absolute return in 8 days (which is equivalent to a +131.3% annualized return-on-investment) if Micron closes above the $15.00 strike price on the Nov2015 options expiration date. 

The implied volatility in the options was high at 49 when this position was established; so the $.47 price per share received when the Puts were sold is very attractive to us option sellers, especially since the level of unknowns between now and next Friday's Nov2015 options expiration is relatively low, given that MU has already announced their quarterly earnings results.  

1.  Micron Technology Inc. (MU) -- New Position
The transaction was as follows:
11/13//2015  Sold 3 MU 100% cash-secured $15.00 Put options @ $.47
Note: The price of MU was $14.92 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $4,508.95
= $15.00*300 + $8.95

Net Profit:
(a) Options Income: +$129.80
= ($.47*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MU is above $15.00 strike price at Nov2015 expiration): +$0.00
= ($17.00-$17.00)*300 shares

Total Net Profit (If MU is above $15.00 strike price at Nov2015 options expiration): +$129.80
= (+$129.80 +$0.00 +$0.00)

Absolute Return (If MU is above $15.00 strike price at Nov2015 options expiration): +2.9%
= +$129.80/$4,508.95
Annualized Return (If MU is above $15.00 at expiration): +131.3%
= (+$129.80/$4,508.95)*(365/8 days)

The downside 'breakeven price' at expiration is at $14.53 ($15.00 - $.47), which is 2.6% below the current market price of $14.92.
The 'crossover price' at expiration is $15.39 ($14.92 + $.47).  This is the price above which it would have been more profitable to simply buy-and-hold Micron stock until Nov 20th (the Nov2015 options expiration date) rather than selling these Put options.

Thursday, November 12, 2015

Country Value Rankings

A comprehensive approach to asset allocation extends beyond diversification solely by asset classes (i.e. stocks, bonds, real estate, commodities, etc.). It should also include diversification by global geography. Behavioral finance research has clearly identified the profound tendency of most investors to succumb to "home-country bias". Legendary investor John Templeton was a leading advocate for developing a globally oriented value investing perspective to achieve investing outperformance.

The Covered Calls Advisor has developed a method for determining the relative investing worthiness of twenty-two countries and two regions around the world.  The "Country Value Rankings" table below is based on a weighted-average ranking system.  The eight factors used to calculate these rankings are as follows:











Today's results, shown in the table below, provides a value-oriented and objective framework that assists this advisor make decisions regarding overweighting and underweighting specific countries and regions in the Covered Calls Advisor's Portfolio.
























 


 

From the chart above, the resulting overall market ratings for individual countries and regions are:
Very Bullish (Above 25 total points) -- China
Bullish (20-25 points) -- Singapore and South Korea
Slightly Bullish (15-20 points) -- Taiwan, Malaysia, Switzerland, Sweden, and Germany
Neutral (10-15 points) -- Emerging Markets, Spain, Hong Kong, Australia, and U.S.A.
Slightly Bearish -- Mexico, United Kingdom, Canada, Europe/Asia Developed Countries, France, and India
Bearish -- Italy and Japan
Very Bearish -- S Africa, Russia, and Brazil



Future investments in the Covered Calls Advisor Portfolio will overweight the higher rated countries. It should also be noted that the U.S. is currently ranked 13th of the 24 ratings and the overall rating for the U.S. is at the very low end of the range for Neutral.

This Country Value Rankings spreadsheet is detailed in terms of both the methodology used and the resources used to capture the information for each country. If you are interested in these details and would like further information or clarification, please email your comments and questions (to the address in the top right sidebar of this blog). They are always welcomed.

Hopefully, this information is helpful in your thinking and analysis of your own equities selection methods related to your covered calls investing process!  Going forward, it is my intention to update this information quarterly.

Regards and Godspeed to All,
Jeff

Monday, November 9, 2015

Covered Calls Position Established in Cummins Inc.

Today, a new covered calls position was established in Cummins Inc. (ticker symbol CMI) with a Nov2015 expiration.  The Cummins stock was purchased at $103.97 and the Nov2015 Call options were simultaneously (i.e. a single buy-write transaction) sold at the $102.00 strike price for $3.12 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Nov 18th) prior to the November 20th options expiration date.  Details of this position are provided below.

1. Cummins Inc. (CMI)
A $.975 quarterly dividend goes ex-dividend on November 18th.  If the current time value (i.e. extrinsic value) of $1.15 [$3.12 option premium - ($103.97 stock price - $102.00 strike price)] remaining in the short call options decay substantially by November 17th (the day prior to the ex-dividend date), then there is a possibility that the call option owner will exercise his/her option and will call the stock away to capture the dividend.  

As shown below, either early assignment or assignment at the Nov2015 options expiration date will provide very good return-on-investment results.

These two potential return-on-investment results are:
If Early Assignment: +1.0% absolute return (equivalent to +41.1% annualized return for the next 9 days) if the stock is assigned early (the business day prior to the Nov 18th ex-div date); OR
If Dividend Capture:  +1.9% absolute return (equivalent to +59.3% annualized return over the next 12 days) if the stock is assigned at Nov2015 expiration on November 20th.

11/09/2015 Bought 200 CMI shares @ $103.97
11/09/2015 Sold 2 CMI Nov2015 $102.00 Call options @ $3.12
11/18/2015 Upcoming ex-dividend of $.975 per share

Two possible overall performance results (including commissions) for this Cummins (CMI) covered calls position are as follows:
Stock Purchase Cost: $20,802.95
= ($103.97*200+$8.95 commission)

Net Profit:
(a) Options Income: +$613.55
= ($3.12*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Nov 18th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Nov2015 expiration): +$195.00
= ($.975 dividend per share x 200 shares)
(c) Capital Appreciation [If stock assigned early on Nov 17th (business day prior to November 18th ex-div date)]: -$402.95
+($102.00-$103.97)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $102.00 at Nov2015 expiration): -$402.95
+($102.00-$103.97)*200 - $8.95 commissions

Total Net Profit (If option exercised on business day prior to ex-div date): +$210.60
= (+$613.55 +$0.00 -$402.95); or
Total Net Profit (If stock assigned at $102.00 at Nov2015 expiration): +$405.60
= (+$613.55 +$195.00 -$402.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.0%
= +$210.60/$20,802.95
Annualized Return (If option exercised early): +41.1%
= (+$210.60/$20,802.95)*(365/9 days); OR

2. Absolute Return (If stock assigned at $102.00 at Nov2015 expiration): +1.9%
= +$405.60/$20,802.95
Annualized Return (If stock assigned): +59.3%
= (+$405.60/$20,802.95)*(365/12 days)

Either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $102.00 strike price.

Established New Position in Time Warner Inc.

Today, the Covered Calls Advisor established a new position in Time Warner Inc. (ticker symbol TWX) by selling three Nov2015 Put options at the $67.50 strike price. This position is a conservative one since it was established with 1.8% downside protection to the strike price.

As detailed below, the Time Warner Inc. investment will yield a +1.6% absolute return in 12 days (which is equivalent to a +47.9% annualized return-on-investment) if TWX closes above the $67.50 strike price on the Nov2015 options expiration date. 

This potential return is excellent given the 1.8% downside protection (from the $68.74 stock price to the $67.50 strike price) when the position was established.  The implied volatility in the options was relatively high at about 32 when this position was established; so the $1.10 price per share received when the Puts were sold is very attractive to us option sellers.     

1.  Time Warner Inc. (TWX) -- New Position
The transaction was as follows:
11/09/2015  Sold 3 TWX 100% cash-secured $67.50 Put options @ $1.10
Note: The price of TWX was $68.74 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 three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,250.00
= $67.50*300

Net Profit:
(a) Options Income: +$318.80
= ($1.10*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TWX is above $67.50 strike price at Nov2015 expiration): +$0.00
= ($67.50-$67.50)*300 shares

Total Net Profit (If TWX is above $67.50 strike price at Nov2015 options expiration): +$318.80
= (+$318.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If TWX is above $67.50 strike price at Nov2015 options expiration): +1.6%
= +$318.80/$20,250.00
Annualized Return: +47.9%
= (+$318.80/$20,250.00)*(365/12 days)

The downside 'breakeven price' at expiration is at $66.40 ($67.50 - $1.10), which is 3.4% below the current market price of $68.74.
The 'crossover price' at expiration is $69.84 ($68.74 + $1.10).  This is the price above which it would have been more profitable to simply buy-and-hold TWX until Nov 20th (the Nov2015 options expiration date) rather than selling these Put options.