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Friday, July 1, 2016

Early Assignment of JPMorgan Chase Covered Calls

The Covered Calls Advisor had a JPMorgan Chase & Co. (ticker JPM) July 2016 covered calls position at the $55 strike price.  Early this morning, I received an email notification from my broker (Schwab) that the 5 JPM Call options were exercised early, so the 500 shares of JPM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $55 strike price.

Details for this JPMorgan covered calls position are provided below.  The JPM shares had risen from $58.14 when purchased (only 4 days ago) to $61.66 at yesterday's market close.  The time value remaining in the Call options had declined to approximately $.44 (based on the midpoint of the $6.95/$7.25 bid/ask spread at the market close yesterday).  Given that the stock price declines at market open today by the $.48 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 $.44 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 $.15 time value remaining near the end of trading on the day prior to the ex-div date.  But as covered calls investors, we are grateful to receive the immediate gift ($.44 per share in this instance) when it does occur. 

As detailed below, the actual return-on-investment result for this closed position was a +1.2% absolute return (equivalent to +106.2% annualized return for the 4 days holding period).

The transactions were:
06/27/2016 Bought 500 JPM shares @ $58.14
06/27/2016 Sold 5 JPM Jul2016 $55.00 Call options @ $3.84
Note: a simultaneous buy/write transaction was executed.
07/01/2016 Upcoming quarterly ex-dividend of $.48 per share
07/01/2016 5 JPM Call options assigned and associated 500 JPM shares sold at $55.00 strike price.  Note: the price of JPM stock was $61.66 at yesterday's market close.

The overall performance result (including commissions) for this JPMorgan covered calls position was as follows:
Stock Purchase Cost: $29,077.95
= ($58.14*500+$7.95 commission)

Net Profit:
(a) Options Income: +$1,916.25
= ($3.84*500 shares) - $3.75 commissions
(b) Dividend Income (Call options exercised early on business day prior to July 1st ex-div date): +$0.00
(c) Capital Appreciation (Early assignment on June 30th): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions

Total Net Profit (Call options exercised on day prior to Jul 1st ex-dividend date): +$338.30
= (+$1,916.25 options income +$0.00 dividend income -$1,577.95 capital appreciation)

Absolute Return: +1.2%
= +$338.30/$29,077.95
Annualized Return (Call options were exercised early): +106.2%
= (+$338.30/$29,077.95)*(365/4 days)

The cash now available from the closing of this JPMorgan Chase covered calls position 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 occur.