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Friday, March 3, 2017

Established New Covered Calls Position in PulteGroup, Inc.

Today, a covered calls positions were established in PulteGroup, Inc. (ticker symbol PHM) with a Mar2017 expiration and at the $22.00 strike price.  This position has an upcoming quarterly ex-dividends on March 8th of $.09 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 March 17th options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a slightly in-the-money covered calls position was established. 

As detailed below, potential return-on-investment result is +1.1% absolute return (equivalent to +78.3% annualized return for the next 5 days) if the stock is assigned early (business day prior to Mar 8th ex-date); OR +1.5% absolute return (equivalent to +36.0% annualized return over the next 15 days) if the stock is assigned at the Mar2017 expiration on March 17th.

PulteGroup, Inc. (PHM) -- New Covered Calls Position
The $.09 dividend of Mar 8th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.25 [$.48 option premium - ($22.23 stock price - $22.00 strike price)] remaining in the short call option decays to about $.10 or less by March 7th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the PulteGroup shares away to capture the dividend.

The transactions were:
03/03/2017 Bought 1,000 PHM shares @ $22.23
03/03/2017 Sold 10 PHM Mar2017 $22.00 Call options @ $.48
Note: a simultaneous buy/write transaction was executed.
03/08/2017 Upcoming ex-dividend of $.09 per share

Two possible overall performance results (including commissions) for this PulteGroup, Inc. covered calls position are as follows:
Stock Purchase Cost: $22,234.95
= ($22.23*1,000+$4.95 commission)
Note: In the category of "I never thought I'd see the day that...", effective today, Schwab stock commission decreases from $6.95 to $4.95 (and to $.65 per option contract).

Net Profit:
(a) Options Income: +$473.50
= ($.48*1,000 shares) - $6.50 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 8th ex-div date): +$0.00; or
(b) Dividend Income (If PHM shares assigned at Mar2017 expiration): +$90.00
= ($.09 dividend per share x 1,000 shares)
(c) Capital Appreciation (If PHM assigned early on Mar 7th): -$234.95
+($22.00-$22.23)*1,000 - $4.95 commissions; or
(c) Capital Appreciation (If PHM assigned at $22.00 at Mar2017 expiration): -$234.95
+($22.00-$22.23)*1,000 - $4.95 commissions

Total Net Profit (If option exercised on day prior to Mar 8th ex-dividend date): +$238.55
= (+$473.50 +$0.00 -$234.95); or
Total Net Profit (If PHM assigned at $22.00 at Mar2017 expiration): +$328.55
= (+$473.50 +$90.00 -$234.95)

1. Absolute Return [If option exercised on Mar 7th (business day prior to ex-dividend date)]: +1.1%
= +$238.55/$22,234.95
Annualized Return (If option exercised early): +78.3%
= (+$238.55/$22,234.95)*(365/5 days); OR

2. Absolute Return (If PHM assigned at $36.00 at Mar2017 expiration): +1.5%
= +$328.55/$22,234.95
Annualized Return: +36.0%
= (+$328.55/$22,234.95)*(365/15 days)

In this instance, early assignment provides higher annualized return, so that outcome is preferable -- but either outcome would provide a very good return-on-investment result.  These returns will be achieved as long as the stock is above the $22.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $21.66 ($22.23 -$.09 -$.48) provides 2.6% downside protection below today's purchase price.

The 'crossover price' at expiration is $22.62 ($22.23 - $.09 + $.48).  This is the price above which it would have been more profitable to simply buy-and-hold Pulte stock until the Mar2017 options expiration date rather than selling these Put options.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a potential for 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 PulteGroup position, ten of eleven criteria were achieved.