Friday, March 10, 2017

Established New Covered Calls Position in Big Lots Inc.

Today, a covered calls positions were established in Big Lots Inc. (ticker symbol BIG) with a Mar2017 expiration and at the $50.00 strike price.  This position has an upcoming quarterly ex-dividends on March 15th of $.25 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 +0.5% absolute return (equivalent to +39.1% annualized return for the next 5 days) if the stock is assigned early (business day prior to Mar 15th ex-date); OR +1.0% absolute return (equivalent to +46.7% annualized return over the next 8 days) if the stock is assigned at the Mar2017 expiration on March 17th.

Big Lots Inc. (BIG) -- New Covered Calls Position
The $.25 dividend of Mar 15th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.30 [$1.42 option premium - ($51.12 stock price - $50.00 strike price)] remaining in the short call option decays to about $.10 or less by March 14th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Big Lots shares away to capture the dividend.

The transactions were:
03/10/2017 Bought 500 BIG shares @ $51.12
03/10/2017 Sold 5 BIG Mar2017 $50.00 Call options @ $1.42
Note: a simultaneous buy/write transaction was executed.
03/15/2017 Upcoming ex-dividend of $.25 per share

Two possible overall performance results (including commissions) for this Big Lots Inc. covered calls position are as follows:
Stock Purchase Cost: $25,564.95
= ($51.12*500+$4.95 commission)

Net Profit:
(a) Options Income: +$701.80
= ($1.42*500 shares) - $8.20 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 15th ex-div date): +$0.00; or
(b) Dividend Income (If BIG shares assigned at Mar2017 expiration): +$125.00
= ($.25 dividend per share x 500 shares)
(c) Capital Appreciation (If BIG assigned early on Mar 14th): -$564.95
+($50.00-$51.12)*500 - $4.95 commissions; or
(c) Capital Appreciation (If BIG assigned at $50.00 at Mar2017 expiration): -$564.95
+($50.00-$51.12)*500 - $4.95 commissions

Total Net Profit (If option exercised on day prior to Mar 15th ex-dividend date): +$136.85
= (+$701.80 +$0.00 -$564.95); or
Total Net Profit (If BIG assigned at $50.00 at Mar2017 expiration): +$261.85
= (+$701.80 +$125.00 -$564.95)

1. Absolute Return [If option exercised on Mar 14th (business day prior to ex-dividend date)]: +0.5%
= +$136.85/$25,564.95
Annualized Return (If option exercised early): +39.1%
= (+$136.85/$25,564.95)*(365/5 days); OR

2. Absolute Return (If BIG assigned at $50.00 at Mar2017 expiration): +1.0%
= +$261.85/$25,564.95
Annualized Return: +46.7%
= (+$261.85/$25,564.95)*(365/8 days)

In this instance, assignment at options expiration provides a slightly 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 $50.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $49.45 ($51.12 -$.25 -$1.42) provides 3.3% downside protection below today's purchase price.

The 'crossover price' at expiration is $52.29 ($51.12 - $.25 + $1.42).  This is the price above which it would have been more profitable to simply buy-and-hold Big Lots 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 Big Lots position, ten of eleven criteria were achieved.