Wednesday, March 8, 2017

Early Assignment of General Motors Co. Covered Calls

Today, General Motors Co. (ticker symbol GM) is ex-dividend at $.38 per share.  The Covered Calls Advisor owned a GM March 2017 covered calls position at the $36.00 strike price.  Early this morning (as expected), I received email and text notifications from my broker (Schwab) that the 10 GM Call options were exercised early, so the 1,000 shares of GM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $36.00 strike price.

Details of the transactions and results for this GM position are provided below.  The shares had risen from $36.90 when purchased (on Feb 28th) to $37.52 at yesterday's market close.  The time value remaining in the Call options had declined to $0.02 (based on the $1.54 midpoint of the $1.53/$1.55 bid/ask spread at the market close yesterday) -- so it was expected that the owner of the Call options would exercise his/her option early to purchase the 1,000 shares in order to capture the $.38 dividend.  In this advisor's experience, early assignment normally occurs only in those relatively deep-in-the-money positions (note: GM was 4.2% in-the-money at market close yesterday) when the Call options time value remaining near the end of trading on the day prior to the ex-div date is $.10 or less and the ex-dividend amount ($.38 in this case) is much greater than the time value the Call buyer forfeits ($.02 in this GM case).  It is also interesting to observe that the Pulte Mar2017 covered calls position (which also went ex-dividend today), also, just like the GM position, had only $.02 of time value remaining -- but those Calls were not exercised (likely because today's ex-dividend amount for Pulte is only $.09). 

The actual return-on-investment result for this closed position was a +0.8% absolute return (equivalent to +33.6% annualized return) for the 9 days holding period.  This result was slightly below the +37.7% annualized ROI that would have occurred if the covered calls had instead been held until expiration and if the options were exercised then.

General Motors Co. (GM) -- Covered Calls Position Closed
The transactions were:
02/28/2017 Bought 1,000 GM shares @ $36.90
02/28/2017 Sold 10 GM Mar2017 $36.00 Call options @ $1.22
Note: a simultaneous buy/write transaction was executed.
03/07/2017 10 Call options exercised and 1,000 shares GM stock sold at $36.00 strike price

The overall performance result (including commissions) for this General Motors covered calls position were as follows:
Stock Purchase Cost: $36,906.95
= ($36.90*1,000+$6.95 commission)

Net Profit:
(a) Options Income: +$1,213.00
= ($1.22*1,000 shares) - $7.00 commissions
(b) Dividend Income (Options exercised early on business day prior to Mar 8th ex-div date): +$0.00
(c) Capital Appreciation: -$906.95
+($36.00-$36.90)*1,000 - $6.95 commissions

Total Net Profit: +$306.05
= (+$1,213.00 options income +$0.00 dividend income -$906.95 capital appreciation)

Absolute Return: +0.8%
= +$306.05/$36,906.95
Annualized Return: +33.6%
= (+$306.05/$36,906.95)*(365/9 days)