Friday, May 19, 2017

Established Covered Calls Position in Goldman Sachs Group Inc.

Today, a covered calls position was established in Goldman Sachs Group Inc. (ticker symbol GS) with a Jun2017 expiration and at the $205.00 strike price.  This position has an upcoming quarterly ex-dividend on May 30th of $.75 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 June 16th 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 +0.6% absolute return (equivalent to +19.8% annualized return for the next 11 days) if the stock is assigned early (business day prior to May 30th ex-date); OR +0.9% absolute return (equivalent to +11.9% annualized return over the next 29 days) if the stock is assigned on the June 16, 2017 options expiration date.

Goldman Sachs Group Inc. (GS) -- New Covered Calls Position
An ex-dividend occurs on May 30th for $.75.  Although very unlikely, if the current time value (i.e. extrinsic value) of $1.35 [$13.05 option premium - ($216.70 stock price - $205.00 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by May 29th (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 200 JPM shares away to capture the dividend payment.

The transactions were:
05/19/2017 Bought 200 GS shares @ $216.70
05/19/2017 Sold 2 GS Jun2017 $205.00 Call options @ $13.05
Note: a simultaneous buy/write transaction was executed.
05/30/2017 Upcoming quarterly ex-dividend of $.75 per share

Two possible overall performance results (including commissions) for this GS covered calls position are as follows:
Stock Purchase Cost: $43,344.95
= ($216.70*200+$4.95 commission)

Net Profit:
(a) Options Income: +$2,603.75
= ($13.05*200 shares) - $6.25 commissions
(b) Dividend Income (If option exercised early on business day prior to May 30th ex-div date): +$0.00; or
(b) Dividend Income (If GS assigned at Jun2017 expiration): +$150.00
= ($.75 dividend per share x 200 shares)
(c) Capital Appreciation (If GS assigned early on May 29th): -$2,344.95
+($205.00-$216.70)*200 - $4.95 commissions; or
(c) Capital Appreciation (If GS assigned at $205.00 at Jun2017 expiration): -$2,344.95
+($205.00-$216.70)*200 - $4.95 commissions

1. Total Net Profit (If option exercised on day prior to May 30th ex-dividend date): +$258.80
= (+$2,603.75 +$0.00 -$2,344.95); or
2. Total Net Profit (If GS assigned at $205.00 at Jun2017 expiration): +$408.80
= (+$2,603.75 +$150.00 -$2,344.95)

1. Absolute Return [If option exercised on May 29th (business day prior to ex-dividend date)]: +0.6%
= +$258.80/$43,344.95
Annualized Return (If option exercised early): +19.8%
= (+$258.80/$43,344.95)*(365/11 days); or
2. Absolute Return (If GS assigned at $205.00 at Jun2017 expiration): +0.9%
= +$408.80/$43,344.95
Annualized Return: +11.9%
= (+$408.80/$43,344.95)*(365/29 days)

Either outcome provides a nice attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $205.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $202.90 ($216.70 -$13.05 -$.75) provides 6.4% 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, only eight of the eleven criteria are achieved for this Goldman Sachs position.