Today, positions were established in Capital One Financial Corp.(ticker symbol COF) and the Energy Select Sector SPDR Fund ETF (ticker XLE). Capital One is a covered calls position with a Feb2016 expiration that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.40 expected on Feb11th. For XLE, two March 2016 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. Capital One Financial Corp: +1.5% absolute
return in 19 days (equivalent to a +29.1% annualized
2. Energy Select Sector SPDR Fund ETF: +3.9% absolute
return in 47 days (equivalent to a +30.5% annualized
Note: the Implied Volatility (IV) of
the options at the time they were sold was 25 for Capital One and 36 for the Energy Select Sector SPDR Fund ETF, 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. Capital One Financial Corp (COF) -- New Covered Call Position
As shown below, two potential return-on-investment results for this position are:
If Dividend Capture: +1.5% absolute return (equivalent to +29.1% annualized return over the next 19 days) if the stock is assigned at the Feb2016 expiration on February 19th.
The transactions were:
02/01/2016 Bought 200 COF shares @ $64.83
02/01/2016 Sold 2 COF Feb2016 $62.50 Call options @ $3.00
Note: a simultaneous buy/write transaction was executed.
02/11/2016 Upcoming ex-dividend of $.40 per share
Two possible overall performance results (including commissions) for this COF covered calls position are as follows:
Stock Purchase Cost: $12,973.95
= ($64.83*200+$7.95 commission)
(a) Options Income: +$590.55
= ($3.00*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 11th ex-div date): +$0.00; or
(b) Dividend Income (If COF assigned at Feb2016 expiration): +$80.00
= ($.40 dividend per share x 200 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 $62.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $61.83 ($64.83 -$3.00) provides a substantial 4.6% downside protection below today's purchase price.
2. Energy Select Sector SPDR Fund ETF (XLE) -- New 100% Cash-Secured Puts Position
02/01/2016 Sold 2 XLE Mar2016 $55.00 100% cash-secured Put options @ $2.21
Note: the price of XLE was $56.78 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: $11,000.00
Note: the price of XLE was $56.78 when these options were sold
(a) Options Income: +$432.55
= ($2.21*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If XLE is above $55.00 strike price at Mar2016 expiration): +$0.00
= ($55.00-$55.00)*200 shares
Total Net Profit (If XLE is above $55.00 strike price at Mar2016 options expiration): +$432.55
= (+$432.55 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If XLE is above $55.00 strike price at Mar2016 options expiration): +3.9%
Annualized Return: +30.5%
= (+$432.55/$11,000.00)*(365/47 days)
downside 'breakeven price' at expiration is at $52.79 ($55.00 - $2.21),
which is 7.0% below the current market price of $56.78.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Mar 18th, 2016 options expiration) for
this XLE short Puts position is 61%. This compares with a
profit of 50.3% for a buy-and-hold of XLE shares over the same
Using this probability of profit of 61%, the expected value annualized return-on-investment (if held until expiration) is +18.6% (+30.5% *
61%), an attractive risk/reward profile for this conservative investment.
'crossover price' at expiration is $58.99 ($56.78 + $2.21). This is the
price above which it would have been more profitable to simply
buy-and-hold XLE until the Mar2016 options expiration date
rather than selling these Put options.