Today, a covered calls position was established in Hanes Brands Inc. (ticker symbol HBI) with a Feb2017 expiration. This covered calls position includes consideration of the upcoming $.15 quarterly dividend on February 10th. Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established with the strike price of $21.00 (below the stock purchase price of $22.05).
As detailed below, a potential return is +3.1% absolute
return in 38 days (equivalent to a +29.8% annualized
Note: This potential result is above the Covered Calls Advisor's desired threshold of 20% annualized return-on-investment.
The detailed transactions and potential return-on-investment result is as follows:
1. Hanes Brands Inc. (HBI) -- New Covered Calls Position
01/11/2017 Bought 1,000 Hanes Brands shares @ $22.05
01/11/2017 Sold 10 HBI Feb2017 $21.00 Call options @ $1.60
Note: this was a simultaneous buy/write transaction.
02/10/2017 Ex-dividend of $150.00 ($.15 x 1,000 shares)
A possible overall performance result (including commissions) would be as follows:
Bought 1,000 shares HBI: $22,057.95
= $22.05*1,000 + $7.95 commission
(a) Options Income: +$1,592.50
= ($1.60*1,000 shares) - $7.50 commissions
(b) Dividend Income: +$150.00
= $.15 * 1,000 shares
(c) Capital Appreciation (If HBI is above $21.00 strike price at Feb2017 expiration): -$1,057.95
= ($21.00-$22.05)*1,000 shares - $7.95 commissions
Total Net Profit (If HBI is above $21.00 strike price at Feb2017 options expiration): +$684.55
= (+$1,592.50 options income +$150.00 dividends -$1,057.95 capital appreciation)
Absolute Return (If HBI is above $21.00 strike price at Feb2017 options expiration): +3.1%
Annualized Return: +29.8%
= (+$684.55/$22,057.95)*(365/38 days)
The downside 'breakeven price' at expiration is at $20.30 ($22.05 - $.15 -$1.60), which is 7.9% below the current market price of $22.05.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Feb 17th, 2017 options expiration) for
this Hanes Brands covered calls position is 68%. This compares with a
profit of 50.3% for a buy-and-hold of Hanes stock over the same
Using this probability of profit of 68%, the Expected Value annualized
ROI of this investment (if held until expiration) is +20.3% (+29.8% * 68%).
The 'crossover price' at expiration is $23.50 ($22.05 + $1.60 - $.15). This is the price above which it would have been more profitable to simply buy-and-hold Hanes stock until Feb 17th (the Feb2017 options expiration date) rather than establishing this covered calls position.