Search This Blog

Tuesday, November 1, 2016

Established Covered Calls Position in Apple Inc.

Today, a covered calls position was established in Apple Inc. (ticker symbol AAPL) with a Nov2016 expiration.  This covered calls position includes consideration of an upcoming $.57 quarterly dividend with an ex-div date of Nov. 3rd (the day after tomorrow). Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered call position was established with the strike price of $110.00 below the stock purchase price of $112.56.

As detailed below, the potential returns are:
Apple Inc.: +1.0% absolute return in 18 days (equivalent to a +19.9% annualized return-on-investment)

Note: This potential result is very close to the Covered Calls Advisor's desired threshold of 20% annualized return-on-investment.  

The transactions and a potential return-on-investment result is as follows:

1.  Apple Inc. (AAPL) -- New Covered Calls Position
The transactions were as follows:
11/01/2016  Bought 300 Apple Inc. shares @ $112.56
11/01/2016 Sold 3 AAPL Nov2016 $110.00 Call options @ $3.13
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 300 shares AAPL: $33,775.95
= $112.56*300 + $7.95 commission

Net Profit:
(a) Options Income: +$936.75
= ($3.13*300 shares) - $2.25 commissions
(b) Dividend Income: +$171.00 = $.57 * 300 shares
(c) Capital Appreciation (If AAPL is above $110.00 strike price at Nov2016 expiration): -$775.95
= ($110.00-$112.56)*300 shares - $7.95 commissions

Total Net Profit (If AAPL is above $110.00 strike price at Nov2016 options expiration): +$331.80
= (+$936.75 options income +$171.00 dividends -$775.95 capital appreciation)

Absolute Return (If AAPL is above $110.00 strike price at Jan2016 options expiration): +1.0%
= +$331.80/$33,775.95
Annualized Return: +19.9%
= (+$331.80/$33,775.95)*(365/18 days)

The downside 'breakeven price' at expiration is at $108.86 ($112.56 - $3.13 -$.57), which is 3.3% below the current market price of $112.56.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Nov 18th, 2016 options expiration) for this Apple Inc. covered calls position is 73%. This compares with a probability of profit of 50.3% for a buy-and-hold of Apple Inc. stock over the same time period. Using this probability of profit of 73%, the Expected Value annualized ROI of this investment (if held until expiration) is +14.5% (+19.9% * 73%).

The 'crossover price' at expiration is $115.12 ($112.56 + $3.13 - $.57).  This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until Nov 18th (the Nov2016 options expiration date) rather than establishing this covered calls position.