Monday, August 21, 2017

Established Covered Calls Positions in Micron Technology Inc. and Voya Financial Inc.

Today, two new Covered Calls positions were established in Micron Technology Inc. and Voya Financial Inc.(ticker VOYA).  The Micron position was established when the stock price was $29.71 and the September 15th, 2017 $28.00 Calls were sold at $2.29.   The Voya stock was purchased at $36.94 and the Sept 15th $36.00 Calls were sold at $1.54.   Both positions are relatively conservative since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral -- Micron has 5.8% downside protection to the strike price and Voya has 2.5%.

As detailed below, the potential returns are:
  • Micron Technology Inc. -- +2.1% absolute return in 26 days (equivalent to a +29.3% annualized return-on-investment). 
  • Voya Financial Inc. -- +1.7% absolute return in 26 days (equivalent to a +23.5% annualized return-on-investment). 
  • Both of these positions exceed the Covered Calls Advisor's desired threshold of >20% returns.


    1. Micron Technology Inc. (MU) -- New Covered Calls Position
    The implied volatility of the Call options was 40.3 when this position was established.    

    The transactions were as follows:
    08/21/2017 Bought 600 shares of Micron @ $29.71 
    08/21/2017 Sold 6 MU Sept 15, 2017 $28.00 Call options @ $2.29
    Note: this was a simultaneous Buy/Write transaction


    A possible overall performance result (including commissions) would be as follows:
    Cost Basis: $16,460.97
    = ($29.71 - $2.29)* 600 shares + $8.97 commission

    Net Profit:
    (a) Options Income: +$1,374.00
    = ($2.29* 600 shares)
    (b) Dividend Income: +$0.00 
    (c) Capital Appreciation (If Micron is above $28.00 strike price at Sept 15th expiration): -$1,030.95
    = ($28.00-$29.71)* 600 shares - $4.95 commission

    Total Net Profit (If MU stock price is above $28.00 strike price at Sept 15th options expiration): +$343.05
    = (+$1,374.00 options income +$0.00 dividend income -$1,030.95 capital appreciation)

    Absolute Return: +2.1%
    = +$343.05/$16,460.97
    Annualized Return: +29.3%
    = (+$343.05/$16,460.97)*(365/26 days)

    The downside 'breakeven price' at expiration is at $27.42 ($29.71 - $2.29), which is 7.7% below the current market price of $29.71.

    The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Micron Technology Covered Calls position is 72.6%. This compares with a probability of profit of 50.2% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 72.6%, the expected value annualized return-on-investment (if held until expiration) is +21.3% (+29.3% * 72.6%), a satisfactory risk/reward profile for this relatively conservative investment.  

    The 'crossover price' at expiration is $32.00 ($29.71 + $2.29).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the Sept 15th, 2017 options expiration date.


     
    2. Voya Financial Inc. (VOYA) -- New Covered Calls Position
    The implied volatility of the Call options was 23.9 when this position was established; so the $1.54 per share received is a nice premium received for these in-the-money (i.e. strike price below the current stock price) Call options.    

    The transactions were as follows:
    08/21/2017 Bought 300 shares VOYA @ $36.94 
    08/21/2017 Sold 3 VOYA Sept 15, 2017 $36.00 Call options @ $1.54
    Note: this was a simultaneous Buy/Write transaction
    08/29/2017 Upcoming $.01 per share ex-dividend

    A possible overall performance result (including commissions) would be as follows:
    Cost Basis: $10,626.96
    = ($36.94 - $1.54)*300 shares + $6.96 commission

    Net Profit:
    (a) Options Income: +$462.00
    = ($1.54*300 shares)
    (b) Dividend Income: +$3.00 = $.01 dividend x 300 shares 
    (c) Capital Appreciation (If VOYA is above $36.00 strike price at Sept 15th expiration): -$286.95
    = ($36.00-$36.94)*300 shares - $4.95 commission

    Total Net Profit (If VOYA stock price is above $36.00 strike price at Sept 15th options expiration): +$178.05
    = (+$462.00 options income +$3.00 dividend income -$286.95 capital appreciation)

    Absolute Return: +1.7%
    = +$178.05/$10,626.96
    Annualized Return: +24.2%
    = (+$178.05/$10,626.96)*(365/26 days)

    The downside 'breakeven price' at expiration is at $35.41 ($36.96 - $.01 - $1.54), which is 4.1% below the current market price of $36.94.

    The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Voya Covered Calls position is 66.4%. This compares with a probability of profit of 50.3% for a buy-and-hold of VOYA shares over the same time period. Using this probability of profit of 66.4%, the expected value annualized return-on-investment (if held until expiration) is +16.1% (+24.2% * 66.4%), a satisfactory risk/reward profile for this relatively conservative investment.  

    The 'crossover price' at expiration is $38.47 ($36.94 - $.01 + $1.54).  This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the Sept 15th, 2017 options expiration date instead of holding this Covered Calls position.

Sunday, August 20, 2017

August 2017 Options Expiration Results

The Covered Calls Advisor Portfolio had seven positions with August 18, 2017 options expirations.  One position (Intel) had an early assignment on the day prior to the ex-dividend date and the results from that position were described here: Link

Of the total seven positions, the remaining six were held until Friday's August 18th expiration.  Of these, three positions (Alibaba Group Holding Ltd., Express Scripts Holding Co., and Micron Technology Inc.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions:
  • Alibaba Group Holding Ltd.:  +1.2% absolute return (+26.3% annualized return) in 17 days
  • Express Scripts Holding Co.:  +1.0% absolute return (+15.5% annualized return) in 23 days  
  • Micron Technology Inc.+2.5% absolute return (+41.7% annualized return) in 22 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these three positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

The remaining three positions (Delta Air Lines Inc., Devon Energy Corp., and Range Resources Corp.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see holdings in right sidebar) until either the stock is sold or a continuation covered calls position is established. 

The details for each of the closed positions is as follows:

1.  Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed 
The transactions were as follows:
08/02/2017  Bought 200 Alibaba shares @ $150.61
08/02/2017 Sold 2 BABA August 18, 2017 $140.00 Call options @ $12.33
Note: this was a simultaneous Buy/Write transaction
08/18/2017 200 BABA shares sold at $140 strike price at Aug 18th options expiration  

The overall performance result (including commissions) was as follows:
Cost Basis: $27,662.29
= ($150.61 -$12.33) * 200 shares + $6.29 commission

Net Profit:
(a) Options Income: +$2,466.00
= ($12.33 *200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA was above $140.00 strike price at August 18, 2017 expiration): -$2,126.95
= ($140.00-$150.61)*200 shares - $4.95

Total Net Profit: +$339.05
= (+$2,466.00 options income +$0.00 dividend income -$2,126.95 capital appreciation)

Absolute Return: +1.2%
= +$339.05/$27,662.29
Annualized Return: +26.3%
= (+$339.05/$27,662.29)*(365/17 days)


2. Express Scripts Holding Co. (ESRX) -- Covered Calls Position Closed
The transactions were as follows:
07/27/2017  Bought 400 Express Scripts Holding Co. shares @ $62.47
07/27/2017 Sold 4 ESRX Aug 18, 2017 $60.00 Call options @ $3.07
Note: this was a simultaneous buy/write transaction.
08/18/2017 400 ESRX shares sold at $60.00 strike price at Aug 18th options expiration

The overall performance result (including commissions) was as follows:
Cost Basis: $23,767.55
= ($62.47 - $3.07) *400 shares + $7.55 commissions

Net Profit:
(a) Options Income: +$1,225.32
= ($3.07*400 shares) - $2.68 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (ESRX is above $60.00 strike price at Aug 18th expiration): -$992.95
= ($60.00-$62.47)*400 shares - $4.95 commissions

Total Net Profit (ESRX was above $60.00 strike price at Aug 18, 2017 options expiration): +$232.37
= (+$1,225.32 options income +$0.00 dividends -$992.95 capital appreciation)

Absolute Return: +1.0%
= +$232.37/$23,767.55
Annualized Return: +15.5%
= (+$232.37/$23,767.55)*(365/23 days)


3. Micron Technology Inc. (MU) -- 100% Cash-Secured Put Options Position Closed
The transactions were as follows:
07/28/2017  Sold 10 MU Aug 18, 2017 $28.00 100% cash-secured Put options @ $.71
Note: the price of Micron's stock was $29.15 today when this transaction was executed.
08/18/2017 10 MU Put options expired since price of stock was above strike price on the 8/18/2017 expiration date

The Covered Calls Advisor does not use margin, so the detailed information on this position and the result shown below reflect the fact that this position was established using 100% cash securitization for the ten Put options sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 shares + $4.95 commission

Net Profit:
(a) Options Income: +$703.30
= ($.71*1,000 shares) - $6.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Micron Technology Inc. was above $28.00 strike price at August 18th expiration): +$0.00
= ($28.00-$28.00)*1,000 shares

Total Net Profit: +$703.30
= (+$703.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.5%
= +$703.30/$28,004.95
Annualized Return: +41.7%
= (+$703.30/$28,004.95)*(365/22 days)

Thursday, August 17, 2017

Established Covered Calls in Applied Materials Inc.

Today, a covered calls position was established in Applied Materials Inc. (ticker symbol AMAT) with an August 25, 2017 expiration and at the $43.00 strike price.  This position has an upcoming quarterly ex-dividend on August 22nd of $.10 per share, so the potential return-on-investment result at expiration includes this dividend.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is an absolute return of  +2.5% which is equivalent to +100.3% annualized return over the next 9 days) if the stock is assigned on the August 25, 2017 options expiration date.
Applied Materials did report quarterly earnings after market close today.  I decided to go forward and establish this position because: (1) AMAT's four largest semiconductor equipment competitors (ASML, LRCX, KLAC, and TER) have already reported earnings and they each soundly beat analysts' EPS expectations (by from 2.8% to 8.0%), so I expected AMAT to do the same; and (2) the implied volatility had expanded to a very high 45.2 which is much higher than the Covered Calls Advisor would have expected for a company that is so closely covered by so many analysts (21 at present) and for which the expected EPS range was relatively narrow at $.82 - $.86.  Here's a short news summary related to Applied Materials' earnings report today:

Applied Materials Posts Better-than-Expected Q3 Results, Q4 Guidance                                      
04:04 PM EDT, 08/17/2017 (MT Newswires) -- Applied Materials (AMAT) reported Q3 revenue of $3.74 billion, up 33% year-over-year and ahead of the analyst consensus of $3.68 billion on Capital IQ. Earnings were $0.86 per share, up 72% year-over-year and topping the Street view of $0.83 per share.
For Q4, the company expects sales in the range of $3.85-$4.0 billion, vs. the analyst consensus of $3.71 billion. Non-GAAP earnings are seen at $0.86-$0.94 per share, vs. expectations for $0.82 per share.

AMAT shares are up more than 3% on 1.1 million shares in aftermarket trading as of 5:00pm today.

Details for this position as well as a possible return-on-investment outcome is provided below.

Applied Materials Inc. -- Covered Calls Position Established
The transactions were:
08/17/2017 Bought 500 AMAT shares @ $43.60
08/17/2017 Sold 5 AMAT Aug 25, 2017 $43.00 Call options @ $1.55
Note: a simultaneous buy/write transaction was executed.
08/22/2017 Upcoming quarterly ex-dividend of $.10 per share

A possible overall performance result (including commissions) for this Applied Materials covered calls position is as follows:
Covered Calls Position Cost Basis: $21,033.30
= ($43.60 stock price -$1.55 options price) *500 shares +$8.30 commissions

Net Profit:
(a) Options Income: +$775.00
= ($1.55*500 shares)
(b) Dividend Income (If AMAT assigned at Aug 25th, 2017 expiration): +$50.00
= ($.10 dividend per share x 500 shares)
(c) Capital Appreciation (If AMAT assigned at $43.00 strike price at Aug 25th options expiration): -$304.95
= ($43.00-$43.60)*500 shares - $4.95 commissions

Total Net Profit (If AMAT assigned at $43.00 at options expiration): +$520.05
= (+$775.00 options income +$50.00 dividend income -$304.95 capital appreciation)

Absolute Return (If AMAT assigned at $43.00 on August 25, 2017 expiration date): +2.5%
= +$520.05/$21,033.30
Annualized Return (If AMAT assigned at $43.00 on August 25th options expiration date): +100.3%
= (+$520.05/$21,033.30)*(365/9 days)

These returns will be achieved as long as the stock is above the $43.00 strike price at expiration.  If the stock declines below the strike price, the breakeven price of $41.95 ($43.60 -$1.55 -$.10) provides 3.8% downside protection below today's $43.60 purchase price.

Established Covered Calls Position in Kohl's Corporation

Today, a covered calls position was established in Kohl's Corporation (ticker symbol KSS) with a September 15, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $35.00 moderately below the stock purchase price of $37.02. 

There is potential for a +3.0% absolute return in 30 days (equivalent to a +36.7% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  An upcoming ex-dividend of $.55 per share will occur on September 1st, so this dividend is included in the potential return-on-investment result detailed below.

The stock price of all big box retailers, including Kohl's, declined today in sympathy with the decline in Walmart stock after it reported decent (but not inspiring) quarterly earnings this morning.  The Covered Calls Advisor believes that Kohl's current valuation relative to its primary competitors is now very attractive:
       



Given this relatively attractive valuation along with Kohl's upcoming generous dividend and attractive options premiums (current implied volatility of 31.0), the Covered Calls Advisor decided to establish the Covered Calls position described below.  It is also noted that Kohl's already reported their earnings last week, so there will be no earnings report surprises prior to the options expiration date.





Kohl's Corporation (KSS) -- New Covered Calls Position
The transactions were as follows:
08/17/2017  Bought 500 Kohl's shares @ $37.02
08/17/2017 Sold 5 KSS Sept 15, 2017 $35.00 Call options @ $2.52
Note: this was a simultaneous buy/write transaction.
09/01/2017 $.55 ex-dividend

A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares KSS: $17,258.30
= ($37.02 -$2.52)*500 + $8.30 commissions

Net Profit:
(a) Options Income: +$1,260.00
= ($2.52*500 shares)
(b) Dividend Income: +$275.00
= $.55 per share x 500 shares
(c) Capital Appreciation (If KSS is above $35.00 strike price at Sept 15th expiration): -$1,014.95
= ($35.00-$37.02)*500 shares - $4.95 commissions

Total Net Profit (If KSS is above $35.00 strike price at Sept 15, 2017 options expiration): +$520.05
= (+$1,260.00 options income +$275.00 dividends -$1,014.95 capital appreciation)

Absolute Return: +3.0%
= +$520.05/$17,258.30
Annualized Return: +36.7%
= (+$520.05/$17,258.30)*(365/30 days)

The downside 'breakeven price' at expiration is at $33.95 ($37.02 - $2.52 -$.55), which is 8.3% below the current market price of $37.02. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Kohl's Corporation covered calls position is 70.6%, so the expected value annualized ROI of this investment (if held until expiration) is +25.9% (+36.7% * 70.6%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $38.99 ($37.02 + $2.52 -$.55).  This is the price above which it would have been more profitable to simply buy-and-hold Kohl's stock until September 15th (the September monthly options expiration date) rather than establishing this covered calls position.

Friday, August 11, 2017

Established Covered Calls in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor established a new Covered Calls position in Alibaba Group Holding Ltd. (ticker symbol BABA) at the September 15, 2017 options expiration and at the $140.00 strike price.  This is the second BABA Covered Calls position now held in the Covered Calls Advisor Portfolio.  The first position was at the same strike price but was for the August 18th options expiration.  This new position is a relatively conservative one since it was established today when the price of Alibaba was $147.68 (5.2% downside protection to the strike price) and 36 calendar days remaining until the options expiration date.

For Alibaba, the chart below (click on the chart to view a larger and more legible version) shows that the potential annualized return of +31.9% for the Covered Calls position is preferable to the +30.4% to establish a comparable 100% Cash-Secured Puts position. 

This potential annualized return-on-investment of +31.9% exceeds the Covered Calls Advisor's desired threshold of >20%. 

The implied volatility of the Call options was 40.2 when this position was established, the highest it has been for Albaba options in more than a year.  This high volatility is largely attributable to the uncertainty associated with the upcoming quarterly earnings report due on August 17th as well as a rapid $10 decline in the stock price this week.  

The downside 'breakeven price' at expiration is at $135.70 ($147.68 - $11.98), which is 8.1% below the current market price of $147.68.  

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the September 15th, 2017 options expiration) for this position is 69.5%. This compares with a probability of profit of 50.2% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 69.5% the expected value for the annualized return-on-investment (if held until expiration) is +22.2% (+31.9% maximum potential annualized return on investment * 69.5%), an attractive risk/reward profile for this conservative investment.  

Finally, the 'crossover price' at expiration is $159.66 ($147.68 + $11.98).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the September 15th options expiration date rather than establishing this Covered Calls position.

Thursday, August 10, 2017

Established Covered Calls in Bank of America and Delta Air Lines

Today, two covered calls positions were established in Bank of America (BAC) and Delta Air Lines (DAL) for the September 15, 2017 options expiration date.  Given the Covered Calls Advisor's current cautious overall market outlook, moderately in-the-money covered calls positions were established in each instance. Also, there are upcoming ex-dividend dates prior to options expiration which are taken into consideration for each of these two positions.

Some potential return-on-investment results for each position are: 
  • Bank of America Corp. -- A +1.3% absolute return in 37 days (equivalent to a +13.2% annualized return-on-investment if assigned at expiration; or a +0.8% absolute return in 19 days (equivalent to a +15.2% annualized return if assigned the day prior to the August 30th ex-dividend date).    
  • Delta Air Lines Inc. -- A +2.3% absolute return in 37 days (equivalent to a +21.9% annualized return-on-investment if assigned at expiration); or a +1.6% absolute return in 11 days (equivalent to a +52.3% annualized return if assigned the day prior to the August 21st ex-dividend date).
Details for the Delta Air Lines position are provided below to explain the position further for those interested in understanding the type of thought processes and calculations underlying establishing these covered calls positions.
 
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
First and foremost, is is essential to invest only in companies that you are bullish about.  Delta meets the Covered Calls Advisor's key quality, value, and growth metrics.  My bullish sentiment is shared by respected analysts including: (1) Outperform by both Schwab Equity Ratings and Reuters Research Average Rating; (2) Buy by Argus (their highest rating); (3) Strong Buy by S&P (their highest rating); (4) Barron's article last weekend on Delta was bullish, indicating a +35% stock price potential sometime during the next two years; and (5) Just today, Barclays initiated a 12-month Overweight target of $70 (See link).  Also, as shown below, the potential rate-of-return exceeds the Covered Calls Advisor's desired threshold of +20% annualized return if assigned at expiration.  Another positive occurred yesterday when the Board authorized a substantial increase in the quarterly dividend from $.2025 to $.305 and DAL stock will go ex-dividend on August 21st, before the September 15th options expiration date for this Covered Calls position.

Because of Put/Call parity, Covered Calls and Cash-Secured Puts are synthetically equivalent strategies (when done at the same strike price for the same expiration date).  However, subtle and temporary differences often exist, so just prior to executing the transactions, a comparison is made to see which strategy provides a better potential return.  For Delta, the chart below shows that the potential annualized return of +21.9% for the Covered Calls position is preferable to the +20.6% for a 100% Cash-Secured Puts position in this instance:
 

You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position".  The "NO" in this case means that Delta does not have a quarterly earnings report prior to the options expiration.

Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that Delta will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to assess whether the pre-determined criteria are met to justify establishing a covered calls position for Delta.  The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, all eleven criteria are achieved for this Delta Air Lines Inc. position.


The transactions were as follows:
08/10/2017  Bought 1,000 Delta Air Lines Inc. shares @ $49.45
08/10/2017 Sold 10 DAL Sept 15, 2017 $48.00 Call options @ $2.20
Note: this was a simultaneous buy/write transaction.
08/30/2017 $.305 ex-dividend

A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 1,000 shares DAL: $47,239.88
= ($49.45 -$2.20)*1,000 + $11.65 commissions

Net Profit:
(a) Options Income: +$2,200.00
= ($2.20*1,000 shares)
(b) Dividend Income: +$305.00
= $.305 per share x 1,000 shares
(c) Capital Appreciation (If DAL is above $48.00 strike price at Sep 15th expiration): -$1,454.95
= ($48.00-$49.45)*1,000 shares - $4.95 commissions

Total Net Profit (If DAL is above $48.00 strike price at Sep 15, 2017 options expiration): +$1,050.05
= (+$2,200.00 options income +$305.00 dividends -$1,454.95 capital appreciation)

Absolute Return: +2.3%
= +$1,080.05/$47,239.88
Annualized Return: +21.9%
= (+$1,080.05/$47,239.88)*(365/37 days)

The downside 'breakeven price' at expiration is at $46.945 ($49.45 - $2.20 -$.305), which is 5.1% below the current market price of $49.45. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Sep 15th, 2017 options expiration) for this Delta Air Lines covered calls position is 70.1%, so the expected value annualized ROI of this investment (if held until expiration) is +15.8% (+22.6% * 70.1%), an attractive result for this moderately in-the-money covered calls position.

The 'crossover price' at expiration is $51.345 ($49.45 + $2.20 -$.305).  This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until September 15th (the September monthly options expiration date) rather than establishing this covered calls position.

Sunday, August 6, 2017

USE EXTREME CAUTION !

There are many ways to measure the current value of the U.S. stock market in comparison to its historic values.  By most valuation-related metrics, the stock market is now (with the S&P 500 at 2,477) substantially overvalued.  Some of my favorite valuation measures are:
  • Total Market Capitalization-to-GDP Ratio -- this has traditionally been Warren Buffet's favorite indicator.  Detailed explanation here: Link   Using this valuation method, the stock market is currently more than 30% overvalued.
  • Price-to-Sales Ratio -- measures total corporate market capitalization as a percentage of total corporate annual sales revenue.  The most recent 'Weekly Market Comment' by John Hussman on their hussmanfunds.com site includes this indicator (along with several others).  Please read this article carefully -- it provides some terrific insights, including an especially lucid explanation of the Federal Reserve Bank's Balance Sheet: Link  By this P/S Ratio method, the stock market is currently more than 40% overvalued.
  • Price-to-Earnings Ratio -- this is the single valuation metric most often used by analysts and investors.  As shown below, the Covered Calls Advisor tracks the current P/E Ratio relative to Annual Inflation as a measure of current market value.  By this P/E relative to Inflation method, the stock market is currently 17% overvalued.
       


















Clearly, each of these Valuation-related metrics provide a 'Bearish' market outlook.  However, remember that Valuation is only one factor (albeit a very important one) in the Covered Calls Advisor's 'Overall Market Meter'.  As shown in the right sidebar, the current 'Overall Market Meter' sentiment is 'Neutral'.  In addition to Valuation, other important factors include:
  • Macroeconomic -- currently Slightly to Moderately Bullish
  • Momentum -- currently Moderately Bullish
  • Future Growth -- currently Neutral to Slightly Bullish
So, the positive macro, momentum, and growth factors are a counterbalance to the bearish valuation indicators.

Recently, you might have noticed that the Covered Calls Advisor has established conservative, in-the-money Covered Calls positions, which is a direct result of the current high market value relative to its historic average.  The S&P 500 is now at 2,477 and is extremely overvalued, so it is prudent to "Use Extreme Caution" with our investments.

Remember this similar sentiment from these three all-time great investors:
  • John Templeton -- "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell"
  • Warren Buffett -- "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful"; and 
  • Benjamin Graham -- "I have every confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public."

Please click on the 'Comments' link below with any thoughts/questions you wish to share.

Regards and Godspeed,
Jeff

Thursday, August 3, 2017

Early Assignment of Intel Corp. Covered Calls

Early this morning I received both email and text notifications from my broker (Schwab) that the 6 Intel Corp. (ticker symbol INTC) Call options were exercised early, so the 600 shares of Intel stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $34.00 strike price. 

Details of the transactions and the result for this Intel position are provided below.  The per share price had increased from $34.65 when the position was originally established (on July 26th) to $36.64 at yesterday's market close.  This stock price increase is largely a result of what I like to call its 'trifecta earnings'.  Trifecta earnings is when the earnings report exceeds analysts' expectations on three key measures: (1) revenues, (2) earnings per share, and (3) forward guidance.  This occurred for Intel's earnings recently reported.  

The time value remaining in the Call options at the market close yesterday was only $.01; so as expected, the Call owners exercised their option to buy the shares in order to capture the dividend.  I  preferred this early assignment outcome instead of keeping the covered calls position and capturing the $.2725 per share ex-dividend today.  This is because early assignment resulted in substantially higher annualized return-on-investment (+53.2% achieved) rather than if the position had instead been assigned on the August 18th options expiration date which (including the $.2725 per share dividend) would have resulted in a +29.3% annualized ROI.
Using my Dividend Capture Strategy spreadsheet has been working nicely.  Last month, excellent early assignment results were achieved with a similar position in JPMorgan Chase & Co:  http://coveredcallsadvisor.blogspot.com/2017/07/early-assignment-of-jpmorgan-chase-co.html
As detailed below, the actual return-on-investment result achieved for this Intel position was a +1.17% absolute return (equivalent to +53.2% annualized return) for the 8 days this position was held.  The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new covered calls position is established, the transactions details of which will be posted on this blog site the same day they occur.



Intel Corp. -- Position Closed
The transactions were:
07/26/2017 Bought 600 INTC shares @ $34.65
07/26/2017 Sold 6 INTC Aug 18, 2017 $34.00 Call options @ $1.05
Note: a simultaneous buy/write transaction was executed.

08/02/2017 Six Call options exercised early (day prior to ex-dividend date) and stock sold at $34.00 strike price.

The overall performance result (including commissions) for this Intel covered calls position was as follows:
Covered Calls Position Cost Basis: $20,168.85
= ($34.65 stock price -$1.05 options price) *600 shares +$8.85 commissions

Net Profit:
(a) Options Income: +$630.00
= ($1.05*600 shares)
(b) Dividend Income (Call options exercised early on August 2nd, the business day prior to ex-div date): +$0.00
(c) Capital Appreciation (INTC assigned early): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions

Total Net Profit: +$235.05
= (+$630.00 options income +$0.00 dividend income -$394.95 capital appreciation)

Absolute Return: +1.17%
= +$235.05/$20,168.85
Annualized Return: +53.2%
= (+$231.03/$20,168.85)*(365/8 days)

Wednesday, August 2, 2017

Established Covered Calls in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor established a new position in Alibaba Group Holding Ltd. (ticker symbol BABA) by establishing two Covered Calls position with September 15, 2017 expiration and at the $140.00 strike price.  This is the second BABA Covered Calls position now in the Covered Calls Advisor Portfolio.  The first position was at the same strike price but was for the August 18th options expiration.  This new position is a relatively conservative one since it was established today when the price of Alibaba was $147.68 (5.2% downside protection to the strike price) and 36 calendar days remaining until the options expiration date. 

For Alibaba, the chart below (click on the chart to view a larger and more legible version) shows that the potential annualized return of +31.9% for the Covered Calls position is preferable to the +30.4% to establish a comparable 100% Cash-Secured Puts position. 



This potential annualized return-on-investment of +31.9% exceeds the Covered Calls Advisor's desired threshold of >20%. 

The implied volatility of the Call options was 40.2 when this position was established, the highest it has been for Albaba options in more than a year.  This high volatility is largely attributable to the uncertainty associated with the upcoming quarterly earnings report due on August 17th as well as a rapid $10 decline in the stock price this week.  


The downside 'breakeven price' at expiration is at $135.70 ($147.68 - $11.98), which is 8.1% below the current market price of $147.68.  

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the September 15th, 2017 options expiration) for this position is 69.5%. This compares with a probability of profit of 50.2% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 69.5% the expected value for the annualized return-on-investment (if held until expiration) is +22.2% (+31.9% maximum potential annualized return on investment * 69.5%), an attractive risk/reward profile for this conservative investment.  

Finally, the 'crossover price' at expiration is $159.66 ($147.68 + $11.98).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the September 15th options expiration date rather than establishing this Covered Calls position.

Tuesday, August 1, 2017

Established Covered Calls Position in Delta Air Lines Inc.

Today, a covered calls position was established in Delta Air Lines Inc. (ticker symbol DAL) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $49.00 slightly below the stock purchase price of $49.97. 

There is potential for a +1.5% absolute return in 18 days (equivalent to a +30.2% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks.  Although a dividend will not be declared for a few days, it is likely that a dividend at least equal to that of prior quarters of $.2025 is expected to go ex-dividend on about August 15th; so this dividend is included in the potential return-on-investment result detailed below.

Delta Air Lines Inc. (DAL) -- New Covered Calls Position
The transactions were as follows:
08/01/2017  Bought 500 Delta Air Lines Inc. shares @ $49.97
08/01/2017 Sold 5 DAL Aug 18, 2017 $49.00 Call options @ $1.50
Note: this was a simultaneous buy/write transaction.
08/15/2017 $.2025 ex-dividend

A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares DAL: $24,243.30
= ($49.97 -$1.50)*500 + $8.30 commissions

Net Profit:
(a) Options Income: +$750.00
= ($1.50*500 shares)
(b) Dividend Income: +$101.25
= $.2025 per share x 500 shares
(c) Capital Appreciation (If DAL is above $49.00 strike price at Aug 18th expiration): -$489.95
= ($49.00-$49.97)*500 shares - $4.95 commissions

Total Net Profit (If DAL is above $49.00 strike price at Aug 18, 2017 options expiration): +$361.30
= (+$750.00 options income +$101.25 dividends -$489.95 capital appreciation)

Absolute Return: +1.5%
= +$361.30/$24,243.30
Annualized Return: +30.2%
= (+$361.30/$10,829.95)*(365/18 days)

The downside 'breakeven price' at expiration is at $48.2675 ($49.97 - $1.50 -$.2025), which is 3.4% below the current market price of $49.97. 

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Delta Air Lines covered calls position is 66.9%, so the expected value annualized ROI of this investment (if held until expiration) is +20.2% (+30.2% * 66.9%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $51.2675 ($49.97 + $1.50 -$.2025).  This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

Friday, July 28, 2017

Established New Position in Micron Technology Inc.

Today, a new position was established in Micron Technology Inc. (ticker MU) by selling ten August 18, 2017 100% cash-secured Put options at the $28.00 strike price.  The short Puts were chosen instead of the comparable covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

The implied volatility of the Put options has increased during the past few days to its current very high level of 42.7 when this position was established; so the $.71 price received per share received when the Puts were sold is a very nice premium to receive for these out-of-the-money Put options (i.e. strike price below the current stock price).  Although Micron stock has already risen by 30% so far this year, Micron was hit with a double whammy to its stock this week.  First, Seagate released a lousy earnings report on Tuesday and Micron's stock also sold off in sympathy.  Second, a Barron's article yesterday speculated that Micron's recent good results might reverse soon, especially if Samsung were to flood the market with additional chip capacity.  Although Barron's is often insightful, the Covered Calls Advisor disagrees in this instance; instead believing that the prospects for Micron remain strong at least through the end of this year.  With this week's sharp sell-off, the stock is now a great value both on a fundamental basis (current P/E of only 6.2 on this year's expected earnings) as well as oversold on a short-term technical basis -- today's RS(2) =14.

As detailed below, for this position there is potential for a +2.5% absolute return in 22 days (equivalent to a +41.7% annualized return-on-investment).


Micron Technology Inc. (MU) -- New 100% Cash-Secured Puts Position
This position was established when the price of Micron Technology Inc. was $29.15 (3.9% downside protection to the strike price) and 22 days remaining until the options expiration date.

The transaction today was as follows:
07/28/2017  Sold 10 MU Aug 18, 2017 $28.00 100% cash-secured Put options @ $.71
Note: the price of Micron's stock was $29.15 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 ten Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 shares + $4.95 commission

Net Profit:
(a) Options Income: +$703.30
= ($.71*1,000 shares) - $6.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron Technology Inc. is above $28.00 strike price at August 18th expiration): +$0.00
= ($28.00-$28.00)*1,000 shares

Total Net Profit (If Micron stock price is above $28.00 strike price at August 18th options expiration): +$703.30
= (+$703.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Micron stock price is above $28.00 strike price at August 18th options expiration) : +2.5%
= +$703.30/$28,004.95
Annualized Return: +41.7%
= (+$703.30/$28,004.95)*(365/22 days)

The downside 'breakeven price' at expiration is at $27.29 ($28.00 - $.71), which is 6.4% below the current market price of $29.15.

The probability of making a profit (if held until the August 18, 2017 options expiration) for this Micron Technology Inc. short Puts position is 67.1%. This compares with a probability of profit of 50.2% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 67.1%, the expected value annualized return-on-investment (if held until expiration) is +28.0% (+19.2% * 67.1%), a satisfactory risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $29.86 ($29.15 + $.71).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the August 18, 2017 options expiration date rather than selling these Put options.

Thursday, July 27, 2017

Established Covered Calls Position in Express Scripts Holding Co.

Today, a covered calls position was established in Express Scripts Holding Co. (ticker symbol ESRX) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current market outlook, an in-the-money covered calls position was established with the strike price of $60.00, below the stock purchase price of $62.47.

As shown in the chart below, a Covered Calls positions was established since the potential annualized return-on-investment result of +15.5% for the Covered Calls was slightly better than the +14.7% for its synthetically equivalent short Put options position


As shown above and also as detailed below, this Express Scripts Covered Calls position has the potential for a +1.0% absolute return in 23 days (equivalent to a +15.5% annualized return-on-investment).   



Express Scripts Holding Co. (ESRX) -- New Covered Calls Position
The transactions were as follows:
07/27/2017  Bought 400 Express Scripts Holding Co. shares @ $62.47
07/27/2017 Sold 4 ESRX Aug 18, 2017 $60.00 Call options @ $3.07
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Cost Basis: $23,767.55
= ($62.47 - $3.07) *400 shares + $7.55 commissions

Net Profit:
(a) Options Income: +$1,225.32
= ($3.07*400 shares) - $2.68 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If ESRX is above $60.00 strike price at Aug 18th expiration): -$992.95
= ($60.00-$62.47)*400 shares - $4.95 commissions

Total Net Profit (If ESRX is above $60.00 strike price at Aug 18, 2017 options expiration): +$232.37
= (+$1,225.32 options income +$0.00 dividends -$992.95 capital appreciation)

Absolute Return: +1.0%
= +$232.37/$23,767.55
Annualized Return: +15.5%
= (+$232.37/$23,767.55)*(365/23 days)

The downside 'breakeven price' at expiration is at $59.40 ($62.47 - $3.07), which is 4.9% below the current market price of $62.47.  A recent quantitative study titled "Which Index Options Should You Sell" link provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options at -0.5 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Express Scripts position, the $60.00 front month option was chosen since its breakeven price is -0.7 standard deviations from the current price of $62.47 and its implied volatility was 23.0.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Express Scripts Holding Co. covered calls position is 75.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of Express Scripts stock over the same time period. Using this probability of profit of 75.8%, the Expected Value annualized ROI of this investment (if held until expiration) is +12.2% (+15.5% * 78.5%), an attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $65.54 ($62.47 + $3.07).  This is the price above which it would have been more profitable to simply buy-and-hold Express Scripts stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

Wednesday, July 26, 2017

Established Covered Calls Position in Intel Corp. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Intel Corp. (ticker symbol INTC) with an August 18, 2017 expiration and at the $34.00 strike price.  This position has an upcoming quarterly ex-dividend on August 3rd of $.2725 per share, so the potential return-on-investment results for this position includes the possibility of early exercise since the ex-dividend is prior to the Aug 18th options expiration date.

As detailed below, two potential return-on-investment results are:
  • A +1.15% absolute return (equivalent to +52.3% annualized return for the next 8 days) if the stock is assigned early (business day prior to August 3rd ex-div date); OR 
  • A +1.96% absolute return (equivalent to +29.7% annualized return over the next 24 days) if the stock is assigned on the August 18, 2017 options expiration date.
Either result substantially exceeds the Covered Calls Advisor's target for a greater than +20% maximum potential annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential covered calls returns can still be achieved in some carefully selected stocks.

Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its comparable short Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "YES*" with an indication that "If 'YES' then consider avoiding position".  Intel does have a quarterly earnings report prior to the options expiration.  In fact, they will report after the market close tomorrow.  I decided to go forward and establish this position because semiconductor manufacturers Texas Instruments and Advanced Micro Devices (same industry as Intel) released their quarterly report yesterday.  Both companies beat analysts' revenue and earnings estimates and they guided next quarter higher than previous guidance -- and their stocks moved higher as a result.  I expect similar good results from Intel.

Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that Intel will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a covered calls position for Intel. The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, ten of the eleven criteria are achieved for this Intel Corp. position.



Details for this position as well as possible return-on-investment outcomes are provided below.

Intel Corp. -- Covered Calls Position Established
An ex-dividend occurs on August 3rd for $.2725.  If the current time value (i.e. extrinsic value) of $.40 [$1.05 option premium - ($34.65 stock price - $34.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by August 2nd (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 600 Intel shares away to capture the dividend payment.

The transactions were:
07/26/2017 Bought 600 INTC shares @ $34.65
07/26/2017 Sold 6 INTC Aug 18, 2017 $34.00 Call options @ $1.05
Note: a simultaneous buy/write transaction was executed.
08/03/2017 Upcoming quarterly ex-dividend of $.2725 per share

Two possible overall performance results (including commissions) for this Intel covered calls position are as follows:
Covered Calls Position Cost Basis: $20,168.85
= ($34.65 stock price -$1.05 options price) *600 shares +$8.85 commissions

Net Profit:
(a) Options Income: +$625.98
= ($1.05*600 shares) - $4.02 commissions
(b) Dividend Income (If option exercised early on August 2nd, the business day prior to ex-div date): +$0.00; or
(b) Dividend Income (If INTC assigned at Aug 18th, 2017 expiration): +$163.50
= ($.2725 dividend per share x 600 shares)
(c) Capital Appreciation (If INTC assigned early): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions; or
(c) Capital Appreciation (If INTC assigned at $34.00 strike price at Aug 18th options expiration): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions

1. Total Net Profit [If option exercised early]: +$231.03
= (+$625.98 options income +$0.00 dividend income -$394.95 capital appreciation); or
2. Total Net Profit (If INTC assigned at $34.00 at expiration): +$394.53
= (+$625.98 options income +$163.50 dividend income -$394.95 capital appreciation)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.15%
= +$231.03/$20,168.85
Annualized Return (If option exercised early): +52.3%
= (+$231.03/$20,168.85)*(365/8 days); or
2. Absolute Return (If INTC assigned at $34.00 on August 18, 2017 expiration date): +1.96%
= +$394.53/$20,168.85
Annualized Return (If INTC assigned at $34.00 on August 18th options expiration date): +29.7%
= (+$394.53/$20,168.85)*(365/24 days)

Early assignment is preferable to the Covered Calls Advisor since it would provide a higher annualized return-on-investment result, but either outcome would provide an excellent result for this investment position.  These returns will be achieved as long as the stock is above the $34.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.3275 ($34.65 -$1.05 -$.2725) provides 3.8% downside protection below today's $34.65 purchase price. 

Continuation of Covered Calls Position in Devon Energy Corp.

Upon the July 21, 2017 options expiration last week, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $33.00 strike price.  So, the July Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when Devon stock was at $33.63, a sell-to-open order was executed to sell 5 August 18th, 2017 Call options at the $35.00 strike price for $.65 per share to continue the Devon Covered Calls position.

The history of this Devon Energy position so far as well as a potential return-on-investment result is detailed below:

Devon Energy Corp. (DVN) -- Continuation Covered Calls Position
The transactions were as follows:
05/25/2017  Bought 500 Devon Energy Corp. shares @ $37.45
05/25/2017 Sold 5 DVN June 16, 2017 $36.00 Call options @ $2.10
Note: this was a simultaneous buy/write transaction.
06/13/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
06/16/2017 5 DVN June 16th, 2017 Call options expired
Note: the price of DVN stock closed at $31.76 upon the June 16th options expiration date.
07/03/2017 Sold 5 DVN July 21, 2017 $33.00 Call options @ $.87 per share
07/21/2017 5 DVN Call options expired
07/26/2017 Sold 5 DVN Aug 18, 2017 $35.00 Call options @ $.65 per share

A possible overall performance result (including commissions) would be as follows:
Bought 500 shares DVN: $18,729.95
= $37.45*500 + $4.95 commission

Net Profit:
(a) Options Income: +$1,800.25
= ($2.10 + $.87+ $.65) *500 shares - 3*$3.25 commissions
(b) Dividend Income: +$30.00
= $.06 * 500 shares
(c) Capital Appreciation (If DVN is above $35.00 strike price at August 18th, 2017 expiration): -$1,229.95
= ($35.00-$37.45)*500 shares - $4.95 commissions

Total Net Profit (If DVN stock is above $35.00 strike price at August 18, 2017 options expiration): +$600.30
= (+$1,800.25 options income +$30.00 dividends -$1,229.95 capital appreciation)

Absolute Return: +3.2%
= +600.30/$18,729.95
Annualized Return: +13.8%
= (+600.30/$18,729.95)*(365/85 days)

Established Covered Calls Position in Range Resources Corp.

Today, a covered calls position was established in Range Resources Corp. (ticker symbol RRC) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $21.00 slightly below the stock purchase price of $21.65. 

As detailed below, there is potential for a +2.7% absolute return in 24 days (equivalent to a +41.0% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks.

Range Resources Corp. (RRC) -- New Covered Calls Position
The transactions were as follows:
07/26/2017  Bought 500 Range Resources Corp. shares @ $21.65
07/26/2017 Sold 5 RRC Aug 18, 2017 $21.00 Call options @ $1.25
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 500 shares RRC: $10,829.95
= $21.65*500 + $4.95 commission

Net Profit:
(a) Options Income: +$621.75
= ($1.25*500 shares) - $3.25 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $21.00 strike price at Aug 18th expiration): -$329.95
= ($21.00-$21.65)*500 shares - $4.95 commissions

Total Net Profit (If RRC is above $21.00 strike price at Aug 18, 2017 options expiration): +$291.80
= (+$621.75 options income +$0.00 dividends -$329.95 capital appreciation)

Absolute Return: +2.7%
= +$291.80/$10829.95
Annualized Return: +41.0%
= (+$291.80/$10829.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $20.40 ($21.65 - $1.25), which is 5.8% (.55 standard deviations) below the current market price of $21.65.  A recent quantitative study titled "Which Index Options Should You Sell" link provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options at -0.5 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Range Resources position, the $21.00 front month option was chosen since its breakeven price is -0.55 standard deviations from the current price of $21.65.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Range Resources Corp. covered calls position is 65.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Range Resources stock over the same time period. Using this probability of profit of 65.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +26.9% (+41.0% * 65.5%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $22.90 ($21.65 + $1.25).  This is the price above which it would have been more profitable to simply buy-and-hold Range Resources stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

Tuesday, July 25, 2017

Closed Foot Locker Inc. Position

There were nine July 21, 2017 options expiration positions in the Covered Calls Advisor Portfolio.  As detailed here (link), seven of the nine positions closed on or before expiration with substantial profits.  The remaining two positions (Devon Energy Co. and Foot Locker Inc.) closed at expiration with their stock price below the strike price.  Today, the Foot Locker position was closed out at a net loss by selling the 500 long shares that remained after last Friday's expiration.  The detailed results from this position are provided below.


Foot Locker Inc. (FL) -- Position Closed
The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Ex-dividend of $.31 per share
07/21/2017 5 FL Call options expired with stock price of $47.21 below the $48.00 strike price
07/25/2017 Sold 500 shares of Foot Locker at $45.74

The overall performance result (including commissions) for this Foot Locker position was as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)

Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions

(b) Dividend Income: +$155.00
= ($.31 dividend per share x 500 shares)
(c) Capital Appreciation (FL stock sold at $45.74: -$1,994.95
+($45.74-$49.72)*500 - $4.95 commissions

Total Net Loss: -$788.15
= (+$1,051.80 +$155.00 -$1,994.95)

Absolute Return: -3.2%
= -$788.15/$24,864.95
Annualized Return: -64.3%
= (-$788.15/$24,864.95)*(365/18 days)

Saturday, July 22, 2017

July 2017 Option Expiration Results

The Covered Calls Advisor Portfolio had nine positions with July 21, 2017 options expirations.  Three positions were closed prior to the July 21st expiration:
  • One covered calls position in JPMorgan Chase & Co. was closed by early assignment --See detailed results here: link
  • Two of these (Range Resources Corp. and Alibaba Group Holding Ltd.) were closed out by the Covered Calls Advisor a week early (on July 14th) since the short Puts had declined to only $.05 (See detailed results here: Range Resources link and here Alibaba link). 
Of the total nine positions, the remaining six were held until yesterday's July 21st expiration.  Of these, four positions (Pioneer Resources Co., Quanta Services Inc., Twenty-First Century Fox Inc., and Voya Financial Inc.) closed in-the-money, so the maximum possible return-on-investment result was achieved.  Details of the transactions and results for each of these positions are provided below.

The return-on-investment results for each closed position was:
  • Pioneer Resources Co.:  +1.8% absolute return (+17.9% annualized return) in 36 days
  • Quanta Services Inc.:  +1.9% absolute return (+17.6% annualized return) in 40 days  
  • Twenty-First Century Fox Inc.+3.1% absolute return (+15.4% annualized return) in 74 days
  • Voya Financial Inc.:  +1.6% absolute return (+19.2% annualized return) in 30 days 
The cash now available in the Covered Calls Advisor Portfolio from the closing of these four positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

The remaining two positions (Devon Energy Corp. and Foot Locker Inc.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see holdings in right sidebar) until they are either sold or a continuation covered calls position is established. 

The details for each of the closed positions is as follows:


1.  Pioneer Resources Co. -- 100% Cash-Secured Put Option Closed at Expiration
This position was established when the price of Pioneer Natural Resources was $156.93 (4.4% downside protection to the $150.00 strike price) and 36 days remaining until the July 21st options expiration date.

The implied volatility of the Put options was 27.8 when this position was established; so the $2.70 price received per share received when the Puts were sold is a nice premium to receive for these out-of-the-money Put options.    

The transactions were as follows:
06/16/2017  Sold 1 PXD July 21, 2017 $150.00 100% cash-secured Put option @ $2.70
07/21/2017 1 PXD Put option expired
Note: Price of PXD was $160.21 on July 21st options expiration date

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 option sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $15,000.00
= $150.00*100

Net Profit:
(a) Options Income: +$264.40
= ($2.70*100 shares) - $5.60 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (PXD was above $150.00 strike price at Jul2017 expiration): +$0.00
= ($150.00-$150.00)*100 shares

Total Net Profit: +$264.40
= (+$264.40 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.8%
= +$264.40/$15,000.00
Annualized Return: +17.9%
= (+$264.40/$15,000.00)*(365/36 days)


2. Quanta Services Inc. (PWR) -- Covered Calls Position Closed
The transactions have been as follows:
05/08/2017  Sold 6 PWR Jun2017 $33.00 100% cash-secured Put options @ $.65
Note: the price of PWR was $34.27 today when this transaction was executed.
06/16/2017 6 PWR Jun2017 Put options expired and 600 shares of PWR were purchased at $33.00 strike price
Note: the price of PWR was $32.10 upon the market close last Friday at Jun2017 expiration
06/19/2017 Sold 6 PWR July 21, 2017 $33.00 Call options @ $.55
Note: the price of PWR was $32.28 when these Call options were sold
07/21/2017 6 Call options in-the-money at expiration, so 600 shares of PWR were sold at $33.00 strike price
Note: the price of PWR was slightly in-the-money at $33.05 upon expiration

The performance result (including commissions) was as follows:
Cost Basis: $19,804.95
= $33.00*600 + $4.95 commission

Net Profit:
(a) Options Income: +$702.30
= ($.65 + $.55) *600 shares - 2*$8.85 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($33.00-$33.00)*600 shares

Total Net Profit (PWR stock was above $33.00 strike price at July 21, 2017 expiration): +$381.15
= (+$381.15 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (PWR above $33.00 strike price at July 21, 2017 options expiration): +1.9%= +$381.15/$19,804.95
Annualized Return: +17.6%
= (+$381.15/$19,804.95)*(365/40 days)


3. Twenty-First Century Fox Inc. (FOXA) -- Covered Calls Position Closed
The transactions have been as follows:
05/08/2017  Sold 10 FOXA Jun2017 $28.00 100% cash-secured Put options @ $.65
Note: the price of FOXA stock was $28.88 today when this transaction was executed.
06/16/2017 10 FOXA Jun2017 Put options expired and 1,000 shares of FOXA were purchased at $28.00 strike price
Note: the price of FOXA was $27.45 upon the market close last Friday at Jun2017 expiration
06/19/2017 Sold 10 FOXA July 21, 2017 $27.00 Call options @ $1.25
Note: the price of FOXA was $27.76 when these Call options were sold
07/21/2017 10 FOXA Call options in-the-money at expiration, so 1,000 shares of FOXA were sold at $27.00 strike price
Note: the price of FOXA was at $27.84 upon expiration


The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 + $4.05 commission

Net Profit:
(a) Options Income: +$1,877.10
= ($.65 +$1.25) *1,000 shares - 2*$11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (FOXA is above $27.00 strike price at July 21, 2017 expiration): -$1,000.00
= ($27.00-$28.00)*1,000 shares

Total Net Profit: +$877.10
= (+$1,877.10 options income +$0.00 dividend income -1,000.00 capital appreciation)

Absolute Return: +3.1%
= +$877.10/$28,004.95
Annualized Return: +15.4%
= (+$877.10/$28,004.95)*(365/74 days)


4. Voya Financial Inc. (VOYA) -- 100% Cash-Secured Puts Closed
This position was established when the price of Voya Financial Inc. was $35.04 (3.0% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 23.5 when this position was established; so the $.55 price received per share received when the Puts were sold is a nice premium to receive for these out-of-the-money Put options (i.e. strike price below the current stock price).    

The transaction was as follows:
06/22/2017  Sold 7 VOYA July 21, 2017 $34.00 100% cash-secured Put options @ $.55
Note: the price of VOYA was $35.04 today when this transaction was executed.
07/21/2017 7 VOYA Put options expired
Note: Price of VOYA was $37.58 on July 21st options expiration date

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 seven Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $23,800.00
= $34.00*700 shares

Net Profit:
(a) Options Income: +$375.50
= ($.55*700 shares) - $9.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (VOYA was above $34.00 strike price at July 21st expiration): +$0.00
= ($34.00-$34.00)*700 shares

Total Net Profit: +$375.50
= (+$375.50 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return : +1.6%
= +$375.50/$23,800.00
Annualized Return: +19.2%
= (+$375.50/$23,800.00)*(365/30 days)

Friday, July 14, 2017

Closed Position in Range Resources Corp.

Today, the Covered Calls Advisor closed out the ten Range Resources Corp. (ticker symbol RRC) July 21, 2017 short Put options position at the $20.00 strike price.  This decision was made since the price of Range Resources stock has risen from $21.44 when the Puts were originally sold to $22.53 today.  So, the majority of the maximum potential profit has already been achieved since the Put options that originally were sold for $.45 per share were today bought back at only $.05 and with 7 days remaining until the July 21, 2017 options expiration date.  Another benefit of closing the position today is that Schwab now offers commission-free transactions on option buy-to-close transactions at $.05 or less.

As detailed below, the actual return-on-investment result for this closed position was a +1.94% absolute return (equivalent to +29.5% annualized return) for the 24 days holding period.  This +29.5% annualized return result was slightly higher than the +25.0% annualized ROI that would have occurred if the Put options had instead expired on the July 21st options expiration date.

The details achieved from closing this Range Resources Corp. position today are as follows:

Range Resources Corp. (RRC) -- Closing Position
This position was established when the price of Range Resources Corp. was $21.44 (6.7% downside protection to the strike price) and 32 days remaining until the July 21st options expiration date.

With the recent decline in the price of oil and gas being accompanied by a swift decline in energy-related stocks, the implied volatility of options in Range Resources have increased substantially from an average of 33.0 during the last quarter to 41.2 this morning when this position was established; so the $.45 price per share received when the Puts were sold is an attractive premium to receive for these out-of-the-money Put options.    

The transactions were as follows:
06/20/2017  Sold 10 RRC July 21, 2017 $20.00 100% cash-secured Put options @ $.45
Note: the price of RRC was $21.44 when these Put options were sold
07/14/2017 Bought-to-Close 10 RRC Put options @ $.05 per share
Note: the price of RRC was $22.53 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 ten Put options sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $20.00*1,000

Net Profit:
(a) Options Income: +$388.55
= ($.45 -$.05)*1,000 shares - $11.45 commissions
Note: No commission by Schwab on buy-to-close transactions at or below $.05 per share
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($20.00-$20.00)*1,000 shares

Total Net Profit: +$388.55
= (+$388.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.94%
= +$388.55/$20,000.00
Annualized Return: +29.5%
= (+$388.55/$20,000.00)*(365/24 days)

Closed Position in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor closed out the Alibaba Group Holding Ltd (ticker symbol BABA) July 21, 2017 short Put options position at the $135.00 strike price.  This decision was made since the price of BABA has risen quickly from the $138.41 price originally to $150.69 today so that there was only $.05 of time value remaining in the Put options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved with 7 days remaining until the July 21, 2017 options expiration date.  Another benefit is that Schwab now offers commission-free transactions on option buy-to-close transactions at $.05 or less.

As detailed below, the actual return-on-investment result for this closed position was a +1.84% absolute return (equivalent to +44.7% annualized return) for the 15 days holding period.  This 44.7% annualized return result was higher than the +29.7% annualized ROI that would have occurred if the Put options had instead expired on the July 21st options expiration date.

The details achieved from closing this Alibaba position today are as follows:

Alibaba Group Holding Ltd (BABA) -- Closing Position
The transactions were as follows:
06/29/2017  Sold 2 BABA 100% cash-secured $135.00 Put options with July 21, 2017 expirations @ $2.56
Note: the price of Alibaba was $138.41 today when this transaction was executed.
07/14/2017 Bought-to-Close 2 BABA Put options @ $.05 per share
Note: the price of BABA was $150.69 when this transaction was executed.

The overall performance result (including commissions) was follows:
100% Cash-Secured Cost Basis: $27,000.00
= $135.00*200 shares

Net Profit:
(a) Options Income: +$495.75
= ($2.56 -$.05) * 200 shares - $6.25 commissions
Note: No commission by Schwab on buy-to-close transactions at or below $.05 per share
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($135.00 -$135.00)*200 shares

Total Net Profit: +$495.75
= (+$495.75 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.84%
= +$495.75/$27,000.00
Annualized Return: +44.7%
= (+$505.75/$27,000.00)*(365/15 days)

Friday, July 7, 2017

Established Covered Calls Position in Foot Locker Inc. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Foot Locker Inc. (ticker symbol FL) with a July 21, 2017 expiration and at the $48.00 strike price.  This position has an upcoming quarterly ex-dividend on July 12th of $.31 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the July 21st options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  A Covered Calls positions was preferable to its comparable short Put options position in this instance since the maximum potential income of $.71 ($.31 ex-div plus $.40 time value) for the Covered Calls was $.04 per share greater than the $.67 that was then available for selling 100% cash-secured Put options.   

As detailed below, a potential return-on-investment result is +0.75% absolute return (equivalent to +54.9% annualized return for the next 5 days) if the stock is assigned early (business day prior to July 12th ex-date); OR +1.4% absolute return (equivalent to +33.5% annualized return over the next 15 days) in the much more likely event that the stock is assigned on the July 21, 2017 options expiration date.


Foot Locker Inc. (FL) -- New Covered Calls Position
An ex-dividend occurs on July 12th for $.31.  If the current time value (i.e. extrinsic value) of $.40 [$2.12 option premium - ($49.72 stock price - $48.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by July 11th (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 500 Foot Locker shares away to capture the dividend payment.

The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Upcoming quarterly ex-dividend of $.31 per share

Two possible overall performance results (including commissions) for this Foot Locker covered calls position are as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)

Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions
(b) Dividend Income (If option exercised early on July 11th, the business day prior to July 12th ex-div date): +$0.00; or
(b) Dividend Income (If FL assigned at July 21st, 2017 expiration): +$155.00
= ($.31 dividend per share x 500 shares)
(c) Capital Appreciation (If FL assigned early on July 11th): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions; or
(c) Capital Appreciation (If FL assigned at $48.00 strike price at July 21st options expiration): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions

1. Total Net Profit [If option exercised on July 11th (business day prior to July 12th ex-dividend date)]: +$186.85
= (+$1,051.80 +$0.00 -$864.95); or
2. Total Net Profit (If FL assigned at $48.00 at July 21st expiration): +$341.85
= (+$1,051.80 +$155.00 -$864.95)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +0.75%
= +$186.85/$24,864.95
Annualized Return (If option exercised early): +54.9%
= (+$186.85/$24,864.95)*(365/5 days); or
2. Absolute Return (If FL assigned at $48.00 at July 21, 2017 expiration): +1.4%
= +$341.85/$24,864.95
Annualized Return (If FL assigned at $48.00 at July 21st expiration): +33.5%
= (+$341.85/$24,864.95)*(365/15 days)

Either outcome provides an excellent return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $48.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $47.29 ($49.72 -$2.12 -$.31) provides 4.9% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, all eleven criteria are achieved for this Foot Locker Inc. position.