Tuesday, November 8, 2016

Established Covered Calls Position in Blackstone Group LP

Today, a covered calls position was established in Blackstone Group LP (ticker symbol BX) with a Dec2016 expiration.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established with the strike price of $23.00 below the stock purchase price of $23.59.

As detailed below, the potential returns are:
Blackstone Group LP: +2.3% absolute return in 39 days (equivalent to a +21.2% annualized return-on-investment)

Note: This potential result exceeds 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.  Blackstone Group LP (BX) -- New Covered Calls Position
The transactions were as follows:
11/08/2016  Bought 1,000 Blackstone shares @ $23.59
11/08/2016 Sold 10 BX Dec2016 $23.00 Call options @ $1.14
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 1,000 shares BX: $23,597.95
= $23.59*1,000 + $7.95 commission

Net Profit:
(a) Options Income: +$1,132.50
= ($1.14*1,000 shares) - $7.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BX is above $23.00 strike price at Dec2016 expiration): -$597.95
= ($23.00-$23.59)*1,000 shares - $7.95 commissions

Total Net Profit (If BX is above $23.00 strike price at Dec2016 options expiration): +$534.55
= (+$1,132.50 options income +$0.00 dividends -$597.95 capital appreciation)

Absolute Return (If BX remains above $23.00 strike price at Dec2016 options expiration): +2.3%
= +$534.55/$23,597.95
Annualized Return: +21.2%
= (+$534.55/$23,597.95)*(365/39 days)

The downside 'breakeven price' at expiration is at $22.45 ($23.59 - $1.14), which is 4.8% below the current market price of $23.59.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 16th, 2016 options expiration) for this Blackstone Group covered calls position is 59%. This compares with a probability of profit of 50.2% for a buy-and-hold of Blackstone stock over the same time period. Using this probability of profit of 59%, the Expected Value annualized ROI of this investment (if held until expiration) is +12.5% (+21.2% * 59%).

The 'crossover price' at expiration is $24.73 ($23.59 + $1.14).  This is the price above which it would have been more profitable to simply buy-and-hold Blackstone stock until Dec 16th (the Dec2016 options expiration date) rather than establishing this covered calls position.