Wednesday, October 18, 2017

Early Close of Nucor Corp. Covered Calls

Today, the Covered Calls Advisor closed out the Nucor Corp. (ticker symbol NUE) covered calls position.  This decision was made since the price of Nucor has risen quickly from the $54.16 purchase price to $57.35 today so that there was only $.05 of time value remaining in the Call options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved.  Given the stock price uncertainty inherent in tomorrow's earnings report, the Covered Calls Advisor decided to lock in the profit today.

As detailed below, the actual return-on-investment result for this closed position was a +3.1% absolute return (equivalent to +22.3% annualized return) for the 51 days holding period.  

Nucor Corp. -- Covered Calls Position is Closed
The transactions were as follows:
08/28/2017  Bought 200 Nucor Corp. shares @ $54.16
08/28/2017 Sold 2 NUE October 20, 2017 $52.50 Call options @ $2.96
Note: this was a simultaneous buy/write transaction.
09/28/2017 Ex-dividend of $.3775 per share
10/18/2017 Sold 200 Nucor Corp. shares @ $57.35 per share
10/18/2017 Bought-to-Close 2 NUE Oct 20th, 2017 $52.50 Call options @ $4.90 per share

The overall performance result (including commissions) was as follows:
Cost Basis Purchase of 200 shares NUE: $10,246.29
= ($54.16 -$2.96)*200 + $6.29 commissions

Net Profit:
(a) Options Income: -$389.34
= ($2.96 - $4.90) *200 shares - $1.34 commissions
(b) Dividend Income: +$75.50
= $.3775 per share x 200 shares
(c) Capital Appreciation: +$633.05
= ($57.35 -$54.16)*200 shares - $4.95 commissions

Total Net Profit: +$319.21
= (-$389.34 options income +$75.50 dividends +$633.05 capital appreciation)

Absolute Return: +3.1%
= +$319.21/$10,246.29
Equivalent Annualized Return: +22.3%
= (+$330.55/$10,246.29)*(365/51 days)

Friday, October 13, 2017

Covered Calls Established for CVS Health Corporation

Today, a Covered Calls positions were established in CVS Health Corporation (ticker CVS).  Given the Covered Calls Advisor's current cautious overall market outlook, a moderately in-the-money Covered Calls position was established with the November 17th, 2017 $70.00 Call options when the stock price was $72.84.  This $70.00 strike price is -0.5 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  Also, there is an upcoming $.50 ex-dividend prior to the options expiration date which is taken into consideration in the details presented below.

As detailed below, some potential return-on-investment results are:
  • A +1.65% absolute return (equivalent to +60.1% annualized return for the next 10 days) if the stock is assigned early (business day prior to the October 23rd ex-div date); OR 
  • A +2.37% absolute return (equivalent to +24.0% annualized return over the next 36 days) if the stock is assigned on the Nov 17th, 2017 options expiration date.
Either result exceeds the Covered Calls Advisor's target for a greater than +20% potential annualized return-on-investment.

1. CVS Health Corporation (CVS) -- New Covered Calls Position
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 synthetically equivalent short 100% Cash-Secured 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".  This position was established because of the Covered Calls Advisor's confidence that analysts' expectations that upcoming earnings per share will be achieved as well as the relatively narrow range of those estimates. 
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 CVS 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 in CVS.

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 CVS Covered Calls position.

For this position, the downside 'breakeven price' at expiration is at $68.35 ($72.84 - $3.99 -$.50), which is 6.2% below the current market price of $72.84. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this CVS Covered Calls position is 68.8%, so the expected value annualized ROI of this investment (if held until expiration) is +16.5% (+24.0% * 68.8%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $76.33 ($72.84 + $3.99 -$.50).  This is the price above which it would have been more profitable to simply buy-and-hold CVS stock until Nov 17th (the November monthly options expiration date) rather than establishing this Covered Calls position.

Wednesday, October 11, 2017

Covered Calls Position Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel (ticker symbol X).  This was established when the stock price was $24.69 and eight October 20th, 2017 $24.00 Calls were sold at $1.05.   U.S. Steel has 2.9% downside protection to the $24.00 strike price, a conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral. 


As detailed below, the potential return-on-investment is +1.5% absolute return in 10 days (equivalent to a +54.6% annualized return-on-investment).  


United States Steel (X) -- New Covered Calls Position
The implied volatility of the Call options was 39.5 when this position was established, a very high level considering that there is no earnings report prior to the Oct. 20th expiration date.
The transactions were as follows:
10/11/2017 Bought 800 shares of United States Steel stock @ $24.69 per share 
10/11/2017 Sold 8 US Steel October 20th, 2017 $24.00 Call options @ $1.05 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,922.31
= ($24.69 - $1.05)* 800 shares + $10.31 commission

Net Profit:
(a) Options Income: +$840.00
= ($1.05* 800 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If USS is above $24.00 strike price at Oct 20th expiration): -$556.95
= ($24.00 -$24.69)* 800 shares - $4.95 commission

Total Net Profit (If US Steel stock price is above $24.00 strike price at Oct 20th options expiration): +$283.05
= (+$840.00 options income +$0.00 dividend income -$556.95 capital appreciation)

Absolute Return: +1.5%
= +$283.05/$18,922.31
Annualized Return: +54.6%
= (+$283.05/$18,922.31)*(365/10 days)

The downside 'breakeven price' at expiration is at $23.64 ($24.69 - $1.05), which is 4.3% below the current market price of $24.69.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this U.S. Steel Covered Calls position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of US Steel shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +37.0% (+54.6% * 67.8%).  

The 'crossover price' at expiration is $25.74 ($24.69 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold US Steel stock until the October 20th, 2017 options expiration date.

Tuesday, October 3, 2017

Roll-Up of JPMorgan Chase & Co. Covered Calls

Today, the Covered Calls position in JPMorgan Chase & Co. was rolled up from the October 20th $87.50 strike price to the Oct 20th $95.50 strike price.  With an upcoming dividend of $.56 in two days and the stock deep in-the-money trading at $97.07 per share, there was only $.04 time value remaining in the short Call options.  Therefore, there is a strong likelihood that the stock would have been called away tomorrow by the owner of the Calls to capture the dividend.

The Covered Calls Advisor decided to roll-up to the $95.50 strike price (with $.54 time value remaining) to ensure that the dividend will be captured and that there is also a good possibility of also capturing the $.54 per share time value as additional profit as long as JPM stock is above the $95.50 strike price on the Oct. 20th expiration date.  If this occurs, the financial result would be a +3.2% absolute return in 46 days (equivalent to a +25.2% annualized return-on-investment) for this JPMorgan Chase position.  Details are provided below.
 
1. JPMorgan Chase & Co. (JPM) --  Covered Calls Roll-Up Continuation
The transactions were:
09/05/2017 Bought 300 JPM shares @ $89.26
09/05/2017 Sold 3 JPM October 20th, 2017 $87.50 Call options @ $3.49
Note: a simultaneous buy/write transaction was executed.
10/03/2017 Bought-to-Close 3 JPM Oct. 20th $87.50 Call options @ $9.61 per share
10/03/2017 Sold-to-Open 3 JPM Oct. 20th $95.50 Call options @ $2.11 per share
10/05/2017 Upcoming quarterly ex-dividend of $.56 per share

A possible overall performance result (including commissions) for this ongoing JPM Covered Calls position is as follows:
Stock Purchase Cost Basis: $25,735.95
= ($89.26 - $3.49) * 300 shares +$4.95 commission

Net Profit:
(a) Options Income: -$1,216.92
= ($3.49 -$9.61 +$2.11) *300 shares - 2* $6.96 commissions

(b) Dividend Income (If JPM assigned at October 20th, 2017 expiration): +$168.00
= ($.56 dividend per share x 300 shares)
(c) Capital Appreciation (If JPM assigned at $95.50 strike price): +1,867.05
+($95.50 -$89.26)*300 - $4.95 commission

Total Net Profit (If JPM assigned on Oct. 20th, 2017 at $95.50 strike price): +$818.13
= (-$1,216.92 +$168.00 +$1,867.05)

Absolute Return (If JPM assigned at $95.50 at Oct 20th, 2017 expiration): +3.2%
= +$818.13/$25,735.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +25.2%
= (+$818.13/$25,735.95)*(365/46 days)

Wednesday, September 27, 2017

Continuation of Covered Calls Position in Range Resources Corp.

Upon the August 18th, 2017 options expiration, the Covered Calls position in Range Resources Corp. (ticker symbol RRC) expired with the stock price below the $21.00 strike price.  So, the August Call options expired and the 500 shares of Range Resources stock were retained in the Covered Calls Advisor Portfolio.  Today, with RRC stock at $20.03, a sell-to-open order was executed to sell 5 October 20th, 2017 Call options at the $21.00 strike price for $.45 per share to continue the Range Resources Covered Calls position.

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


Range Resources Corp. (RRC) -- Continuation 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.
08/18/2017 5 RRC Aug 18, 2017 Call options expired
Note: price of RRC was $17.92 upon options expiration
09/27/2017 Sold 5 RRC October 20th, 2017 $21.00 Call options @ $.45 per share
Note: the price of RRC stock was $20.03 today when the Oct 20th Call options were sold

A possible overall performance result (including commissions) would be as follows:
Cost Basis of 500 shares of RRC: $10,204.95
= ($21.65 - $1.25)*500 shares + $4.95 commission

Net Profit:
(a) Options Income: +$838.35
= ($1.25 + $.45) *500 shares - $11.65 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $21.00 strike price at Oct 20th expiration): -$329.95
= ($21.00-$21.65)*500 shares - $4.95 commissions

Total Net Profit (If RRC is above $21.00 strike price at Oct 20th, 2017 options expiration): +$508.40
= (+$838.35 options income +$0.00 dividends -$329.95 capital appreciation)

Absolute Return: +5.0%
= +$508.40/$10,204.95
Annualized Return: +21.1%
= (+$508.40/$10,204.95)*(365/86 days)

Monday, September 25, 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) with 26 days remaining until the October 20th, 2017 options expiration date.  This position is a relatively conservative one since it was established today when the price of Alibaba was $169.05 (5.4% downside protection to the $160.00 strike price).  This strike price is -0.68 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  

For Alibaba, the chart below (click on the chart to view a larger and more legible version) shows that the potential annualized return of +18.4% for this Covered Calls position is preferable to the +16.8% to establish a comparable 100% Cash-Secured Puts position. 

The implied volatility of the Call options was 30.3 when this position was established and the open interest was 20,811 contracts  

The downside 'breakeven price' at expiration is at $157.90 ($169.05 - $11.15), which is 6.6% below the current market price of $169.05.  

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 20th, 2017 options expiration) for this position is 76.1%. 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 76.1%, the expected value for the annualized return-on-investment (if held until expiration) is +14.0% (+18.4% maximum potential annualized return on investment * 76.1%), an attractive risk/reward profile for this conservative investment.  

Finally, the 'crossover price' at expiration is $180.20 ($169.05 + $11.15).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Oct. 20th options expiration date rather than establishing this Covered Calls position.

Friday, September 15, 2017

September 2017 Options Expiration Results

 The Covered Calls Advisor Portfolio had eight Covered Calls positions with September 15th, 2017 options expirations.  Every position  closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions:
  • Alibaba Group Holding Ltd.:  +3.15% absolute return (+31.9% annualized return) in 36 days
  • Applied Materials Inc.:  +2.1% absolute return (+35.1% annualized return) in 22 days  
  • Bank of America Corp.: +1.3% absolute return (+13.2% annualized return) in 37 days
  • Delta Air Lines Inc. (position #1): +1.0% absolute return (+7.8% annualized return) in 45 days
  • Delta Air Lines Inc. (position #2): +2.3% absolute return (+21.9% annualized return) in 37 days
  • Micron Technology Inc.+2.1% absolute return (+29.3% annualized return) in 26 days
  • Tenneco Inc.: +1.22% absolute return (+23.4% annualized return) in 19 days
  • Voya Financial Inc.+1.7% absolute return (+23.5% annualized return) in 26 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these 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.  



Thursday, September 14, 2017

Continuation of Covered Calls Position in Devon Energy Corp.

Upon the August 18th, 2017 options expiration, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $35.00 strike price.  So, the August Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when Devon stock had risen to $34.12, a sell-to-open order was executed to sell 5 October 20th, 2017 Call options at the $35.00 strike price for $.89 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
08/18/2017 5 DVN Call options expired
Note: the price of DVN stock was $30.40 upon expiration of the Aug 18th Call options
09/14/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
09/14/2017 Sold 5 DVN October 20th, 2017 $35.00 Call options @ $.89 per share
Note: the price of DVN stock was $34.12 today when the Oct 20th Call options were sold

A possible overall performance result (including commissions) would be as follows:
Cost Basis of Purchase of 500 shares DVN: $17,679.95
= ($37.45 - $2.10)*500 + $4.95 commission

Net Profit:
(a) Options Income: +$2,241.60
= ($2.10 + $.87 + $.65 + $.89) *500 shares - 4*$3.35 commissions
(b) Dividend Income: +$60.00
= ($.06 + $.06) * 500 shares
(c) Capital Appreciation (If DVN is above $35.00 strike price at Oct 20th, 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 Oct 20, 2017 options expiration): +$1,017.65
= (+$2,241.60 options income +$60.00 dividends -$1,229.95 capital appreciation)

Absolute Return: +5.8%
= +$1,017.65/$17,679.95
Annualized Return: +14.2%
= (+$1,017.65/$17,679.95)*(365/148 days)

Friday, September 8, 2017

Early Assignment of MGM Resorts International Covered Calls

This morning the Covered Calls Advisor received email, phone mail, and text notifications from my broker (Schwab) that the 7 MGM Resorts International (ticker symbol MGM) September 15th, 2017 Call options were exercised early, so the 700 shares of MGM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $30.00 strike price. 

Early exercise by the owners of these Call options was plausible since there was only $0.04 per share [$4.03 midpoint of Call options bid/ask price - ($33.99 current stock price - $30.00 strike price)] time value remaining in these Call options.  So the Call owners were willing to immediately forego the remaining $0.04 per share time value by exercising their option to buy the shares (in order to capture today's $0.11 per share ex-dividend).  The per share stock price had increased from $31.56 when this MGM position was originally established on August 28th to $33.99 at yesterday's market close.

The Covered Calls Advisor preferred this early assignment outcome instead of keeping the Covered Calls position and capturing the $0.11 per share ex-dividend today since this early assignment resulted in higher annualized return-on-investment (+27.1% achieved) rather than if the position had instead been assigned on the September 15th options expiration date; which (including the $0.11 per share dividend) would have resulted in a +22.8% annualized ROI. Using the Dividend Capture Strategy spreadsheet has been working nicely recently.  In addition to this MGM position, recent early assignments in Kohl's, Intel, and JPMorgan Chase Covered Calls positions have achieved nice return-on-investment results. 

As detailed below, the actual return-on-investment result achieved for this MGM position was a +0.8% absolute return (equivalent to +27.1% annualized return) for the 11 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.


MGM Resorts International -- Covered Calls Position Closed by Early Assignment
The transactions were as follows:
08/28/2017  Bought 700 MGM Resorts International shares @ $31.56
08/28/2017 Sold 7 MGM Sept 15, 2017 $30.00 Call options @ $1.81 and the implied volatility of these options was 29.2 when this buy/write transaction was executed.
09/07/2017 Seven Call options exercised early (day prior to ex-dividend date); so stock assigned (sold) at $30.00 strike price.
Note: the price of MGM was $33.99 when these Calls were exercised

The overall performance result (including commissions) was as follows:
Cost Basis of 7 Covered Calls in MGM: $20,834.64
= ($31.56 -$1.81)*700 + $9.64 commissions

Components of Net Profit:
(a) Options Income: +$1,267.00
= ($1.81*700 shares)
(b) Dividend Income: $0.00
(c) Capital Appreciation: -$1,096.95
= ($30.00-$31.56)*700 shares - $4.95 commissions

Total Net Profit (MGM assigned early on day prior to Sept 8th ex-dividend date) : +$170.05
= (+$1,267.00 options income +$0.00 dividends - $1,096.95 capital appreciation)

Absolute Return: +0.8%
= +$170.05/$20,834.64
Equivalent Annualized Return: +27.1%
= (+$170.05/$20,834.64)*(365/11 days)



Tuesday, September 5, 2017

Covered Calls Position Established in Discover Financial Services

Today, a Covered Calls positions was established in Discover Financial Services (ticker symbol DFS).  This was established when the stock price was $58.46 and three October 20th, 2017 $57.50 Calls were sold at $2.36.   This is are relatively conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral, so Discover has 1.6% downside protection to the $57.50 strike price.

Discover is currently rated as a good value by many in the investment community.  Ratings by 24 analysts are: 9 Buys; 8 Outperforms; 6 Neutral; and 1 Underperform.  In addition, the current Discover Financial Services target price for some services I follow are well above its current $58.46 price: S&P -- $73; Argus -- $74; and Credit Suisse -- $82. 

As detailed below, the potential return-on-investment is +2.5% absolute return in 46 days (equivalent to a +19.6% annualized return-on-investment).  


Discover Financial Services (DFS) -- New Covered Calls Position
The implied volatility of the Call options was 21.7 when this position was established.
The transactions were as follows:
09/05/2017 Bought 300 shares of Discover Financial Services @ $58.46 
09/05/2017 Sold 3 DFS October 20th, 2017 $57.50 Call options @ $2.36
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,836.96
= ($58.46 - $2.36)* 300 shares + $6.96 commission

Net Profit:
(a) Options Income: +$708.00
= ($2.36* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DFS is above $57.50 strike price at Oct 20th expiration): -$292.95
= ($57.50 -$58.46)* 300 shares - $4.95 commission

Total Net Profit (If Discover stock price is above $57.50 strike price at Oct 20th options expiration): +$415.05
= (+$708.00 options income +$0.00 dividend income -$292.95 capital appreciation)

Absolute Return: +2.5%
= +$415.05/$16,836.96
Annualized Return: +19.6%
= (+$415.05/$16,836.96)*(365/46 days)

The downside 'breakeven price' at expiration is at $56.10 ($58.46 - $2.36), which is 4.0% below the current market price of $58.46.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this Discover Financial Services Covered Calls position is 59.0%. This compares with a probability of profit of 50.2% for a buy-and-hold of Discover shares over the same time period. Using this probability of profit of 59.0%, the expected value annualized return-on-investment (if held until expiration) is +11.6% (+19.6% * 59.0%).  

The 'crossover price' at expiration is $60.82 ($58.46 + $2.36).  This is the price above which it would have been more profitable to simply buy-and-hold Discover Financial Services stock until the October 20th, 2017 options expiration date.

Covered Calls Established for JPMorgan Chase & Co., Las Vegas Sands Corp., and Western Digital Corp.

Today, three Covered Calls positions were established in JPMorgan Chase & Co. (ticker symbol JPM),  Las Vegas Sands Corp. (LVS),  and Western Digital Corp. (WDC).  The October 20th, 2017 options expiration was chosen for all three positions.  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 for all three companies and this is taken into consideration in the details presented below.

Some potential return-on-investment results for each position are:  
  • JPMorgan Chase & Co. -- A +2.6% absolute return in 46 days (equivalent to a +20.3% annualized return-on-investment if assigned at the October 20th expiration; or a +2.0% absolute return in 28 days (equivalent to a +25.7% annualized return if assigned the day prior to the October 3rd ex-dividend date).
  • Las Vegas Sands Corp. -- A +2.6% absolute return in 46 days (equivalent to a +20.8% annualized return-on-investment if assigned at expiration); or a +1.4% absolute return in 15 days (equivalent to a +33.9% annualized return if assigned the day prior to the September 20th ex-dividend date).  
  • Western Digital Corp. -- A +3.57% absolute return in 46 days (equivalent to a +28.3% annualized return-on-investment if assigned at expiration); or a +2.96% absolute return in 23 days (equivalent to a +47.0% annualized return if assigned the day prior to the September 28th ex-dividend date).
Detailed transactions and possible results for each position are provided below.
 
1. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend is expected to occur on October 3rd for $.50.  If the current time value (i.e. extrinsic value) of $1.73 [$3.49 option premium - ($89.26 stock price - $87.50 strike price)] remaining in the short Call options decays substantially (down to about $.15 or less) by October 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 300 JPM shares away to capture the dividend payment.

The transactions were:
09/05/2017 Bought 300 JPM shares @ $89.26
09/05/2017 Sold 3 JPM October 20th, 2017 $87.50 Call options @ $3.49
Note: a simultaneous buy/write transaction was executed.
10/03/2017 Upcoming quarterly ex-dividend of $.50 per share

Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost Basis: $25,735.95
= ($89.26 - $3.49) * 300 shares +$4.95 commission

Net Profit:
(a) Options Income: +$1,040.04
= ($3.49*300 shares) - $6.96 commissions
(b) Dividend Income (If option exercised early on Oct 2nd, the business day prior to Oct 3rd ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at October 20th, 2017 expiration): +$150.00
= ($.50 dividend per share x 300 shares)
(c) Capital Appreciation (If JPM assigned): -$532.95
+($87.50-$89.26)*300 - $4.95 commission

1. Total Net Profit [If option exercised on Oct 2nd (business day prior to Oct 3rd ex-dividend date)]: +$507.09
= (+$1,040.04 +$0.00 -$532.95); or
2. Total Net Profit (If JPM assigned at $87.50 at Oct 20, 2017 expiration): +$657.09
= (+$1,040.04 +$150.00 -$532.95)

1. Absolute Return [If option exercised on Oct 2nd, 2017 (business day prior to ex-dividend date)]: +2.0%
= +$507.09/$25,735.95
Annualized Return (If option exercised early): +25.7%
= (+$507.09/$25,735.95)*(365/28 days); or
2. Absolute Return (If JPM assigned at $87.50 at Oct 20th, 2017 expiration): +2.6%
= +$657.09/$25,735.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +20.3%
= (+$657.09/$25,735.95)*(365/46 days)

Either outcome provides a satisfactory return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $87.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $85.27 ($89.26 -$3.49 -$.50) provides 4.5% downside protection below today's $89.26 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, nine of the eleven criteria are achieved for this JPMorgan position.




2. Las Vegas Sands Corp (LVS) -- New Covered Calls Position
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 synthetically equivalent short Cash-Secured 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 "NO*" with an indication that "If 'YES' then consider avoiding position".  Las Vegas Sands next quarterly earnings report is after the October 20, 2017 options expiration date.
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 LVS 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 Las Vegas Sands.

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 Las Vegas Sands position.

For this position, the downside 'breakeven price' at expiration is at $58.43 ($61.90 - $2.74 -$.73), which is 5.6% below the current market price of $61.90. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 20th, 2017 options expiration) for this Las Vegas Sands Covered Calls position is 65.1%, so the expected value annualized ROI of this investment (if held until expiration) is +13.5% (+20.8% * 65.1%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $63.91 ($61.90 + $2.74 -$.73).  This is the price above which it would have been more profitable to simply buy-and-hold LVS stock until October 20th (the October monthly options expiration date) rather than establishing this Covered Calls position.



3. Western Digital Corporation (WDC) -- New Covered Calls Position
The $.50 ex-dividend upcoming on September 28th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $2.47 [$6.32 option premium - ($88.85 stock price - $85.00 strike price)] remaining in the short Call options decay well below (probably about $.10 or less) the upcoming $.50 dividend payment by Sept 27th (the business day prior to the ex-div date), then it is possible that the Call options owner would exercise early and call the Western Digital shares away to capture the dividend.

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 synthetically equivalent short Cash-Secured Put options position in this instance:


In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $85.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $82.03 ($88.85 -$6.32 -$.50) provides 7.7% downside protection below today's $88.85 purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this Western Digital Corporation position, all eleven criteria were achieved.




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Please feel free to 'Comment' below or email me at the address shown in the upper right sidebar of this blog with any comments or questions.

Monday, September 4, 2017

Understanding the Terms 'Exercise' and 'Assignment'

Options related investing can be complex, especially compared to a basic buy-and-hold strategy.  Because of this complexity, it is especially important to be precise in the words we choose to explain ourselves.  But my observation over the years has been that clarity when a commentator on CNBC describes an options position he/she has taken is more often than not woefully inadequate.  A typical example is a comment like "I sold some Calls on Amazon today."  How frustrating!  This comment gives us virtually no useful information, not even if the analyst is bullish or bearish on the stock.  At a minimum they should say whether (1) the Calls were established at-the-money, in-the-money, or out-of-the-money; and (2) whether they are Naked Calls, Covered Calls, or some form of options spread transaction being established in conjunction with existing options in the same stock.    Ideally they should say something like "Today I established an out-of-the-money Covered Calls position in Amazon at the $980 strike for the September 15th expiration.  This will yield a 28% annualized return if assigned at expiration."    

One area where I have noticed substantial confusion is the difference between the term 'exercise' and the term 'assignment'.  To be honest, over the years I have often, incorrectly, used these two words interchangeably.

Whenever I seek clarity on the meaning of a particular investing-related concept, I first go to a wonderful site that is basically a dictionary of investing words and terminology -- investopedia.com. 
Before reading the sentences about the terms 'exercise' and 'assignment' from Investopedia presented below, here is a basic background insight to help you distinguish the primary difference between these two terms:
  1. Exercising an option is done by the option buyer.
  2. Assignment occurs to the option seller (as a direct result of the option buyer's exercise).


Explanations from Investopedia
  • Exercise:
In options trading, the buyer (or holder) of a call contract may exercise his or her right to buy the underlying shares at the specified price (the strike price); the buyer of a put contract may exercise his or her right to sell the underlying shares at the agreed-upon price. If the buyer chooses to exercise the option, he or she must inform the option seller (the writer of the option contract). This is achieved through an exercise notice, the broker's notification that a client wishes to exercise his or her right to buy or sell the underlying security. The exercise notice is forwarded to the option seller via the Options Clearing Corporation. Even though the buyer has the right but not the obligation to exercise the option, the seller is obligated to fulfill the terms of the contract if the buyer decides to exercise the option.

  • Assignment:
"Assignment" is the designation by a clearinghouse of an option writer who will be required to buy (in the case of a put) or sell (in the case of a call) the underlying futures contract or security when an option has been exercised, especially if it has been exercised early.


How do these terms apply to Covered Calls?
Example #1: If we own a Covered Calls position where the stock price is in-the-money (stock price above the strike price) at market close on the options expiration date, then we are are 'assigned' so that we are required to sell the long stock position underlying the short Call options held.  At this point, both the long stock and short Call options positions are liquidated to cash. 
Example #2: Again, we own a Covered Calls position.  We are short Call options.  But remember, for every Call option sold, that same Call option has been bought by someone else.  The Call option buyer (owner) has the right to sell his option on the open market at any time.  But instead of simply selling his option, he/she can instead 'exercise' their Call option, meaning they have decided to buy the associated shares in the stock from someone who is short the same Call option.  Note: a Call option owner is only incentivized to 'exercise' their option on either: (1) the day prior to an ex-dividend date; if the option is deep in-the-money so the time value remaining in the option is much less than the ex-dividend amount (for example, an ex-div of $.50 when the remaining time value is $.05 or less); or (2) only a few days prior to the options expiration date and the option is deep in-the-money such that the remaining time value in the option is very small (normally $.10 or less) relative to the price of the stock. 

These two examples demonstrate what I mean in the first sentence above that: "Options related investing can be complex."


Here's a short mental exercise to check your own understanding of these two terms:
As we know, Covered Calls and Cash-Secured Puts are synthetically equivalent positions when done at the same strike price for the same expiration date.  So, think through how the terms 'exercised' and 'assigned' are used when describing actions resulting from a short Cash-Secured Puts position.
Be patient in doing this because correct use of these two terms is definitely not easy to master.

I hope this blog post has been helpful.  As always, your comments or questions are welcomed.
Please 'Comment' at the link below or, if you prefer, email me at the address shown on the upper right sidebar of this blog.

Best Regards and Godspeed,
Jeff  

Saturday, September 2, 2017

Continuation of Delta Air Lines Inc. Covered Calls Position

This is the first of two Covered Calls positions in Delta Air Lines Inc. in the Covered Calls Advisor Portfolio.  The initial position expired at the August 18th, 2017 options expiration.  Yesterday afternoon, a continuation of this position was established by selling 5 Sept 15, 2017 $48.00 Calls at $.66 per share.  The original Aug2017 position closed with the Delta stock price below the breakeven price, so this Sept 15th position is an attempt to repair the losses from the original investment and to salvage a small profit by the Sept 15th expiration date.  A potential result for this Delta position is for a +1.0% absolute return over 45 days (equivalent to a +7.8% annualized return-on-investment) if Delta closes above the $48.00 strike price on September 15th.   


Delta Air Lines Inc. (DAL) -- Continuation of 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.
08/18/2017 5 DAL Call options expired with stock price below strike price 
08/21/2017 $.305 ex-dividend
09/01/2017 Sold 5 DAL Sept 15, 2017 $48.00 Call options @ $.66 to continue Delta Covered Calls position

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: +$1,071.70
= ($1.50 + $.66) *500 shares - $8.30 commission
(b) Dividend Income: +$152.50
= $.305 per share x 500 shares
(c) Capital Appreciation (If DAL is above $48.00 strike price at Sept 15th expiration): -$989.95
= ($48.00-$49.97)*500 shares - $4.95 commissions

Total Net Profit (If DAL is above $48.00 strike price at Sept 15, 2017 options expiration): +$234.25
= (+$1,071.70 options income +$152.50 dividends -$989.95 capital appreciation)

Absolute Return: +1.0%
= +$234.25/$24,243.30
Annualized Return: +7.8%
= (+$234.25/$24,243.30)*(365/45 days)

Friday, September 1, 2017

Early Assignment of Kohl's Corporation Covered Calls

This morning I received both email and text notifications from my broker (Schwab) that the 5 Kohl's Corporation (ticker symbol KSS) Call options were exercised early, so the 500 shares of Kohl's stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $35.00 strike price. 

Early exercise by the owners of these Call options was expected since there was no time value remaining in these options.  So the owners exercised their option to buy the shares in order to capture the $.55 per share dividend that goes ex-dividend today.  The per share price had increased from $37.02 when this position was originally established (on August 17th) to $39.23 at yesterday's market close. 

As detailed below, the actual return-on-investment result achieved for this Kohl's position was a +1.4% absolute return (equivalent to +37.0% annualized return) for the 14 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.


Kohl's Corporation (KSS) -- Covered Calls Position Closed
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.
08/31/2017 Five Call options exercised early (day prior to ex-dividend date) and stock sold at $35.00 strike price.

The overall performance result (including commissions) for this Kohl's covered calls position was as follows:
Covered Calls Position Cost Basis: $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: +$0.00
(c) Capital Appreciation: -$1,014.95
= ($35.00-$37.02)*500 shares - $4.95 commissions

Total Net Profit: +$245.05
= (+$1,260.00 options income +$0.00 dividends -$1,014.95 capital appreciation)

Absolute Return: +1.4%
= +$245.05/$17,258.30
Annualized Return: +37.0%
= (+$245.05/$17,258.30)*(365/14 days)

Wednesday, August 30, 2017

Established Covered Calls in Best Buy Inc.

Today, a Covered Calls position was established in Best Buy Inc. (ticker symbol BBY) with an October 20th, 2017 expiration and at the $52.50 strike price.  This morning, Best Buy declared a quarterly dividend of $.34 with an ex-dividend date of September 18th, so the potential return-on-investment results for this position includes the possibility of early exercise since the ex-dividend is prior to the October 20th options expiration date.

As shown below, two potential return-on-investment results are:
  • A +3.30% absolute return (equivalent to +75.2% annualized return for the next 17 days) if the stock is assigned early (business day prior to the September 18th ex-div date); OR 
  • A +3.96% absolute return (equivalent to +27.8% annualized return over the next 52 days) if the stock is assigned on the Oct 20th, 2017 options expiration date.
Either result exceeds the Covered Calls Advisor's target for a greater than +20% potential annualized return-on-investment. 

Given the Covered Calls Advisor's current Neutral 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 synthetically equivalent short Cash-Secured 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 "NO*" with an indication that "If 'YES' then consider avoiding position".  Best Buy does not have a quarterly earnings report prior to the options expiration date.
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 Best Buy 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 Best Buy. 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 Best Buy position.




Best Buy Inc. (BBY) -- New Covered Calls Position
An ex-dividend occurs on August 3rd for $.2725.  In the relatively unlikely event that the current time value (i.e. extrinsic value) of $1.70 [$3.37 option premium - ($54.17 stock price - $52.50 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by September 14th (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 200 Best Buy shares away to capture the dividend payment.

The transactions were:
08/30/2017 Bought 200 BBY shares @ $54.17
08/30/2017 Sold 2 BBY Oct 20, 2017 $52.50 Call options @ $3.37
Note: the implied volatility for these Call options was 30.6 when this simultaneous buy/write transaction was executed.
09/18/2017 Upcoming quarterly ex-dividend of $.34 per share

Two possible overall performance results (including commissions) for this Best Buy covered calls position are as follows:
Covered Calls Position Cost Basis: $10,166.29
= ($54.17 stock price -$3.37 options price) *200 shares +$6.29 commissions

Net Profit:
(a) Options Income: +$674.00
= ($3.37*200 shares)
(b) Dividend Income (If option exercised early on Sept 15th, the business day prior to ex-div date): +$0.00; or
(b) Dividend Income (If BBY assigned at Oct 20th, 2017 expiration): +$68.00
= ($.34 dividend per share x 200 shares)
(c) Capital Appreciation (If BBY assigned): -$338.95
+($52.50 -$54.17)*200 shares - $4.95 commissions


1. Total Net Profit [If option exercised early]: +$335.05
= (+$674.00 options income +$0.00 dividend income -$338.95 capital appreciation); or
2. Total Net Profit (If Best Buy assigned at $52.50 at expiration): +$403.05
= (+$674.00 options income +$68.00 dividend income -$338.95 capital appreciation)

1. Absolute Return (If option exercised on Sept 15th, the business day prior to ex-dividend date): +3.30%
= +$335.05/$10,166.29
Annualized Return (If option exercised early -- on Sept 15th): +75.2%
= (+$335.05/$10,166.29)*(365/17 days); or
2. Absolute Return (If BBY assigned at $52.50 on Oct 20, 2017 expiration date): +3.96%
= +$403.05/$10,166.29
Annualized Return (If BBY assigned at $52.50 on Oct 20th options expiration date): +27.8%
= (+$403.05/$10,166.29)*(365/52 days)

The downside 'breakeven price' at expiration is at $50.46 ($54.17 - $3.37 -$.34), which is 6.8% below the current market price of $54.17. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 20th, 2017 options expiration) for this Best Buy Inc. covered calls position is 61.4%, so the expected value annualized ROI of this investment (if held until expiration) is +17.1% (+27.8% * 61.4%), an attractive result for this moderately in-the-money covered calls position.

The 'crossover price' at expiration is $57.20 ($54.17 + $3.37 -$.34).  This is the price above which it would have been more profitable to simply buy-and-hold Best Buy stock until October 20th (the October monthly options expiration date) rather than establishing this covered calls position.

Monday, August 28, 2017

Covered Calls Established in MGM Resorts International and Nucor Corp.

Today, two covered calls positions were established in MGM Resorts International (ticker symbol MGM) and Nucor Corp. (NUE).  The September 15th expiration was chosen for the MGM position and the October 20, 2017 expiration for the Nucor position.  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 both options expirations which are also taken into consideration.

Some potential return-on-investment results for each position are: 
  • MGM Resorts International -- A +1.2% absolute return in 19 days (equivalent to a +22.8% annualized return-on-investment if assigned at expiration; or a +0.8% absolute return in 11 days (equivalent to a +27.1% annualized return if assigned the day prior to the September 8th ex-dividend date).    
  • Nucor Corp. -- A +3.2% absolute return in 54 days (equivalent to a +21.8% annualized return-on-investment if assigned at expiration); or a +2.5% absolute return in 31 days (equivalent to a +29.3% annualized return if assigned the day prior to the September 28th ex-dividend date).
Detailed transactions and possible return-on-investment results for both positions are provided below.
 
1. MGM Resorts International -- New Covered Calls Position
The transactions were as follows:
08/28/2017  Bought 700 MGM Resorts International shares @ $31.56
08/28/2017 Sold 7 MGM Sept 15, 2017 $30.00 Call options @ $1.81 and the implied volatility of these options was 29.2 when this buy/write transaction was executed.
09/08/2017 Upcoming $.11 per share ex-dividend.

Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 700 shares MGM: $20,834.64
= ($31.56 -$1.81)*700 + $9.64 commissions

Net Profit:
(a) Options Income: +$1,267.00
= ($1.81*700 shares)
(b) Dividend Income (If assigned at Sept 15th expiration): +$77.00
= $.11 per share x 700 shares; OR
(b) Dividend Income (If assigned early on Sept 7th -- day prior to Sept 8th ex-dividend): $0.00
(c) Capital Appreciation: -$1,096.95
= ($30.00-$31.56)*700 shares - $4.95 commissions

Total Net Profit:
(a)  (If MGM is above $30.00 strike price at Sep 15, 2017 options expiration): +$247.05
= (+$1,267.00 options income +$77.00 dividends -$1,096.95 capital appreciation); OR
(b) (If MGM is called away early on day prior to Sept 8th ex-dividend date): +$170.05
= (+$1,267.00 options income +$0.00 dividends - $1,096.95 capital appreciation)

(a) Absolute Return if Assigned at Expiration: +1.2%
= +$247.05/$20,834.64
Equivalent Annualized Return: +22.8%
= (+$247.05/$20,834.64)*(365/19 days); OR

(b) Absolute Return if Assigned on Sept 7th (day prior to Ex-Dividend): +0.8%
= +$170.05/$20,834.64
Equivalent Annualized Return: +27.1%
= (+$170.05/$20,834.64)*(365/11 days)

The downside 'breakeven price' at expiration is at $29.64 ($54.16 - $2.96 -$.3775), which is 6.1% below the current market price of $31.56. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Sep 15th, 2017 options expiration) for this MGM Covered Calls position is 79.8%, so the expected value annualized ROI of this investment (if held until expiration) is +18.2% (+22.8% * 79.8%), an attractive result for this moderately in-the-money covered calls position.

The 'crossover price' at expiration is $33.26 ($31.56 + $1.81 -$.11).  This is the price above which it would have been more profitable to simply buy-and-hold MGM stock until September 15th (the September monthly options expiration date) rather than establishing this Covered Calls position.



2. Nucor Corp. -- New Covered Calls Position
The transactions were as follows:
08/28/2017  Bought 200 Nucor Corp. shares @ $54.16
08/28/2017 Sold 2 NUE October 20, 2017 $52.50 Call options @ $2.96
Note: this was a simultaneous buy/write transaction.
09/28/2017 Expected upcoming $.3775 ex-dividend per share

Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 200 shares NUE: $10,246.29
= ($54.16 -$2.96)*200 + $6.29 commissions

Net Profit:
(a) Options Income: +$592.00
= ($2.96*200 shares)
(b) Dividend Income (If assigned at Oct 20th expiration): +$75.50
= $.3775 per share x 200 shares; OR
(b) Dividend Income (If assigned early on Sept 27th -- day prior to Sept 28th ex-dividend): $0.00
(c) Capital Appreciation (If NUE is above $52.50 strike price at assignment): -$336.95
= ($52.50-$54.16)*200 shares - $4.95 commissions

Total Net Profit:
(a)  (If NUE is above $52.50 strike price at Oct 20, 2017 options expiration): +$330.55
= (+$592.00 options income +$75.50 dividends -$336.95 capital appreciation); OR
(b) (If NUE is called away early on day prior to Sept 28th ex-dividend date): +$255.05
= (+$592.00 options income +$0.00 dividends - $336.95 capital appreciation)

(a) Absolute Return if Assigned at Expiration: +3.2%
= +$330.55/$10,246.29
Equivalent Annualized Return: +21.8%
= (+$330.55/$10,246.29)*(365/54 days); OR

(b) Absolute Return if Assigned on Sept 27th (day prior to Ex-Dividend date): +2.5%
= +$255.05/$10,246.29
Equivalent Annualized Return: +29.3%
= (+$255.05/$10,246.29)*(365/31 days)

The downside 'breakeven price' at expiration is at $50.8225 ($54.16 - $2.96 -$.3775), which is 6.2% below the current market price of $54.16. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Oct 20th, 2017 options expiration) for this Nucor Covered Calls position is 63.0%, so the expected value annualized ROI of this investment (if held until expiration) is +13.7% (+21.8% * 63.0%), an attractive result for this moderately in-the-money covered calls position.

The 'crossover price' at expiration is $56.7425 ($54.16 + $2.96 -$.3775).  This is the price above which it would have been more profitable to simply buy-and-hold Nucor stock until October 20th (the October monthly options expiration date) rather than establishing this Covered Calls position.

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Please feel free to 'Comment' below or email me at the address shown in the upper right sidebar of this blog with any questions.

Established Covered Calls Position in Tenneco Inc.

Today, a Covered Calls position was established in Tenneco Inc. (ticker symbol TEN) with a September 15, 2017 expiration and at the $50.00 strike price.  This position has an upcoming quarterly ex-dividend on September 6th of $.25 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 Sept 15th options expiration date.

As shown below, two potential return-on-investment results are:
  • A +0.72% absolute return (equivalent to +29.0% annualized return for the next 9 days) if the stock is assigned early (business day prior to the September 6th ex-div date); OR 
  • A +1.22% absolute return (equivalent to +23.4% annualized return over the next 19 days) if the stock is assigned on the Sept 16th, 2017 options expiration date.
Either result exceeds the Covered Calls Advisor's target for a greater than +20% 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.

The majority of Tenneco's business is as a premier supplier to virtually all major automobile and light truck original equipment manufacturers (OEMs) worldwide in two areas: (1) emissions control systems, and (2) intelligent suspension systems.  Tenneco's stock market valuation metrics are currently attractive relative to some of its primary competitors:
One of the many Screeners developed by the Covered Calls Advisor is the 'Buffett Screener', which attempts to replicate methods used by Warren Buffett in his stock selection process; and Tenneco appeared on this screen.  In addition, over the weekend I read a thorough and helpful bullish position update analysis on Tenneco presented by Kyle Guske on New Constructs.  


Given the Covered Calls Advisor's current Neutral 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 "NO*" with an indication that "If 'YES' then consider avoiding position".  Tenneco does not have a quarterly earnings report prior to the options expiration date.
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 Tenneco 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 Tenneco. 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, nine of the eleven criteria are achieved for this Tenneco Inc. position.


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 a very good result for this investment position.  These returns will be achieved as long as the stock is above the $50.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $49.37 ($52.73 -$3.11 -$.25) provides 6.4% downside protection below today's $52.73 purchase price. 

Saturday, August 26, 2017

Established New Covered Calls Position in Applied Materials Inc.

Yesterday was options expiration for August 25th.  Late in afternoon trading, it was apparent that the Covered Calls Advisor's Applied Materials (ticker AMAT) Aug 25th $43.00 Covered Calls position would close in-the-money and the position would be closed.  That did occur (Link).  The terrific returns were achieved because of the very high 45.2 implied volatility when the position was established; primarily because of the upcoming earnings report that occurred prior to the Aug 25th expiration.  AMAT's good earnings report helped maintain the AMAT stock price above the strike price until yesterday's expiration.  Despite the typical volatility crush (explanation of 'volatility crush') that occurs after the earnings report (from 45.2 to 25.6 in this case), the potential return-on-investment for a new position was still attractive enough (an absolute return of  +2.1% which is equivalent to +35.1% annualized return over the next 22 days) to warrant establishing another Covered Calls investment in Applied Materials.


Applied Materials Inc. -- New Covered Calls Position Established
The transactions were:
08/25/2017 Bought 500 AMAT shares @ $43.38
08/25/2017 Sold 5 AMAT Sept 15, 2017 $43.00 Call options @ $1.28
Note: a simultaneous buy/write transaction was executed.

A possible overall performance result (including commissions) for this Applied Materials covered calls position is as follows:
Covered Calls Position Cost Basis: $21,058.30
= ($43.38 stock price -$1.28 options price) *500 shares +$8.30 commissions

Net Profit:
(a) Options Income: +$640.00
= ($1.28*500 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AMAT assigned at $43.00 strike price at Sept 15th options expiration): -$194.95
= ($43.00-$43.38)*500 shares - $4.95 commissions

Total Net Profit (If AMAT assigned at $43.00 at options expiration): +$445.05
= (+$640.00 options income +$0.00 dividend income -$194.95 capital appreciation)

Absolute Return: +2.1%
= +$445.05/$21,058.30
Annualized Return: +35.1%
= (+$445.05/$21,058.30)*(365/22 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 $42.10 ($43.38 -$1.28) provides 3.0% downside protection.

August 25th Expiration Result -- Applied Materials Position Closed

The Covered Calls Advisor Portfolio (CCAP) contained one position (Applied Materials Inc.) with an August 25th, 2017 options expiration.  The five Call options expired in-the-money so the maximum potential return-on-investment (ROI) result of  +2.5% absolute return (equivalent to +100.3% annualized return for the 9 days holding period) was achieved. 


Applied Materials Inc. -- Covered Calls Position Closed
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 Quarterly ex-dividend of $.10 per share
08/25/20175 AMAT Call options expired in-the-money so the 500 AMAT shares were sold at the $43.00 strike price
Note: the price of AMAT shares was $43.31 at yesterday's options expiration (at market close)

The overall performance result (including commissions) for this Applied Materials covered calls position was:
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
= ($1.55*500 shares)
(b) Dividend Income ($.10 per share ex-dividend on 8/22/2017): +$50.00
= ($.10 dividend per share x 500 shares)
(c) Capital Appreciation (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: +$520.05
= (+$775.00 options income +$50.00 dividend income -$304.95 capital appreciation)

Absolute Return: +2.5%
= +$520.05/$21,033.30
Annualized Return on Investment: +100.3%
= (+$520.05/$21,033.30)*(365/9 days)

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)