Friday, February 19, 2016

Established Covered Calls Position in Tesoro Corporation

Today, a covered calls position was established in Tesoro Corporation (ticker symbol TSO).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established with a March 2016 $65.00 strike price, well below today's stock purchase price of $68.77.  This position also includes consideration of a $.50 quarterly dividend with an upcoming ex-div date of Feb 25th. 

The Covered Calls Advisor believes that TSO is very underpriced now, being both short-term oversold and also longer-term undervalued.  With the recent dramatic decline in Tesoro's stock price, another benefit of selling these Call options now is that their implied volatility is very high, so the return-on-investment potential, as detailed below, is very attractive.

As detailed below, a potential return-on-investment result is +3.5% absolute return (equivalent to +44.3% annualized return over the next 29 days) if the stock is assigned at the Mar2016 expiration on March 18th.

1. Tesoro Corporation (TSO) -- New Covered Calls Position
The transactions were:
02/19/2016 Bought 200 Tesoro Corporation shares @ $68.77
02/19/2016 Sold 2 TSO Mar2016 $65.00 Call options @ $5.78
Note: a simultaneous buy/write transaction was executed.
02/25/2016 Upcoming dividend of $.50 per share

The overall performance result (including commissions) for this Tesoro covered calls position if the stock closes above the $65 strike price at expiration is as follows:
Stock Purchase Cost: $13,761.95
= ($68.77*200+$7.95 commission)

Net Profit:
(a) Options Income: +$1,146.55
= ($5.78*200 shares) - $9.45 commissions

(b) Dividend Income: +$100.00
= ($.50 dividend per share x 200 shares)
(c) Capital Appreciation (If TSO assigned at $65.00 at Mar2016 expiration): -$761.95
+($65.00-$68.77)*200 - $7.95 commissions

Total Net Profit (If Tesoro stock called away at $65.00 at Mar2016 expiration): +484.60
= (+$1,146.55 +$100.00 -$761.95)

Absolute Return: +3.5%
= +$484.60/$13,761.95
Annualized Return: +44.3%
= (+$484.60/$13,761.95)*(365/29 days)