Search This Blog

Thursday, March 23, 2017

Established Covered Calls Position in JPMorgan Chase & Co.

Today, a covered calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) with an Apr2017 expiration and at the $85.00 strike price.  This position has an upcoming quarterly ex-dividend on April 4th of $.50 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the April 21st options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is +1.1% absolute return (equivalent to +32.0% annualized return for the next 12 days) if the stock is assigned early (business day prior to April 4th ex-date); OR +1.6% absolute return (equivalent to +19.8% annualized return over the next 30 days) if the stock is assigned on the April 21, 2017 options expiration date.

JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend occurs on Apr 4th for $.50.  Although very unlikely, if the current time value (i.e. extrinsic value) of $.95 [$3.16 option premium - ($87.21 stock price - $85.00 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by April 3rd (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 400 JPM shares away to capture the dividend payment.

The transactions were:
03/23/2017 Bought 400 JPM shares @ $87.21
03/23/2017 Sold 4 JPM Apr2017 $85.00 Call options @ $3.16
Note: a simultaneous buy/write transaction was executed.
04/04/2017 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: $34,888.95
= ($87.21*400+$4.95 commission)

Net Profit:
(a) Options Income: +$1,256.45
= ($3.16*400 shares) - $7.55 commissions
(b) Dividend Income (If option exercised early on business day prior to April 4th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Apr2017 expiration): +$200.00
= ($.50 dividend per share x 400 shares)
(c) Capital Appreciation (If JPM assigned early on April 3rd): -$888.95
+($85.00-$87.21)*400 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $55.00 at Jul2016 expiration): -$888.95
+($85.00-$87.21)*400 - $4.95 commissions

1. Total Net Profit (If option exercised on day prior to April 4th ex-dividend date): +$367.50
= (+$1,256.45 +$0.00 -$888.95); or
2. Total Net Profit (If JPM assigned at $85.00 at Apr2017 expiration): +$567.50
= (+$1,256.45 +$200.00 -$888.95)

1. Absolute Return [If option exercised on April 3rd (business day prior to ex-dividend date)]: +1.1%
= +$367.50/$34,888.95
Annualized Return (If option exercised early): +32.0%
= (+$367.50/$34,888.95)*(365/12 days); or
2. Absolute Return (If JPM assigned at $85.00 at Apr2017 expiration): +1.6%
= +$567.50/$34,888.95
Annualized Return: +19.8%
= (+$567.50/$34,888.95)*(365/30 days)

Either outcome provides 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, the breakeven price of $83.55 ($87.21 -$3.16 -$.50) provides 4.2% 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 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.