As detailed below, a potential return is +0.8% absolute return in 12 days (equivalent to a +24.9% annualized return-on-investment)
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. Capital One Financial Corp. (COF) -- New Covered Calls Position
02/06/2017 Bought 300 Capital One Financial shares @ $87.78
02/06/2017 Sold 3 COF Feb2017 $85.50 Call options @ $2.63
Note: this was a simultaneous buy/write transaction.
02/09/2017 Ex-dividend of $120.00 ($.40 x 300 shares)
A possible overall performance result (including commissions) would be as follows:
Bought 300 shares COF: $26,340.95
= $87.78*300 + $6.95 commission
(a) Options Income: +$786.75
= ($2.63*300 shares) - $2.25 commissions
(b) Dividend Income: +$120.00
= $.40 * 300 shares
(c) Capital Appreciation (If COF is above $85.50 strike price at Feb2017 expiration): -$690.95
= ($85.50-$87.78)*300 shares - $6.95 commissions
Total Net Profit (If COF is above $85.50 strike price at Feb2017 options expiration): +$215.80
= (+$786.75 options income +$120.00 dividends -$690.95 capital appreciation)
Absolute Return (If COF is above $85.50 strike price at Feb2017 options expiration): +0.8%
Annualized Return: +24.9%
= (+$215.80/$26,340.95)*(365/12 days)
The downside 'breakeven price' at expiration is at $84.75 ($87.78 - $.40 -$2.63), which is 3.5% below the current market price of $87.78.
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 Capital One covered calls position is 78.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Capital One stock over the same time period. Using this probability of profit of 78.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +19.6% (+24.9% * 78.5%).
The 'crossover price' at expiration is $90.01 ($87.78 + $2.63 - $.40). This is the price above which it would have been more profitable to simply buy-and-hold Capital One stock until Feb 17th (the Feb2017 options expiration date) rather than establishing this covered calls position.