Wednesday, March 9, 2016

Early Assignment of General Motors Corp. Covered Calls

The Covered Calls Advisor has two General Motors Mar2016 covered calls positions (one at the $29 strike price and one at $30).  Early this morning, I received an email notification from my broker that the $29 position was exercised early, so the stock was assigned (i.e. sold) at the $29 strike price.  The $30 position was not exercised, so the $30 covered calls position remains in the Covered Calls Advisor Portfolio.

Details for the $29 covered calls position are provided below.  The General Motors shares had risen from $29.96 when purchased to $30.30 at yesterday's market close and the time value remaining in the call option had declined to $.37 (based on the midpoint of the bid/ask spread at the market close yesterday).  Given that the stock price declines at market open today by the $.38 ex-div amount, I was somewhat surprised that the owner of the Call options exercised his/her option early since they immediately forfeited the remaining $.37 time value to purchase the shares (and capture the dividend).  In this advisor's experience, early assignment normally occurs only in those uncommon deep-in-the-money positions when there is less than $.10 time value remaining near the end of trading on the day prior to the ex-div date.  But as covered calls investors, we are grateful to receive the immediate gift ($.37 per share in this instance) when it does occur. 

As detailed below, the actual return-on-investment result for this closed position was a +0.6% absolute return (equivalent to +30.6% annualized return for the 7 days holding period).

The transactions were:
03/02/2016 Bought 300 GM shares @ $29.96
03/02/2016 Sold 3 GM Mar2016 $29.00 Call options @ $1.17
Note: a simultaneous buy/write transaction was executed.
03/09/2016 Upcoming ex-dividend of $.38 per share
03/09/2016 3 GM Call options assigned and associated 300 GM shares sold at $29.00 strike price.  Note: the price of GM stock was $30.30 at yesterday's market close.

The overall performance result (including commissions) for this GM covered calls position was as follows:
Stock Purchase Cost: $8,995.95
= ($29.96*300+$7.95 commission)

Net Profit:
(a) Options Income: +$348.75
= ($1.17*300 shares) - $2.25 commissions
(b) Dividend Income (Call options exercised early on business day prior to Mar 9th ex-div date): +$0.00
(c) Capital Appreciation (Early assignment on Mar 8th): -$295.95
+($29.00-$29.96)*300 - $7.95 commissions

Total Net Profit (Call options exercised on day prior to Mar 9th ex-dividend date): +$52.80
= (+$348.75 +$0.00 -$295.95)

Absolute Return: +0.6%
= +$52.80/$8,995.95
Annualized Return (If option exercised early): +30.6%
= (+$52.80/$8,995.95)*(365/7 days)