As detailed below, potential return-on-investment results for this GM position are:
- If Dividend Capture: +2.4% absolute return (equivalent to +37.5% annualized return over the next 23 days) if the stock is assigned at the Jun2017 expiration on June 16th.
General Motors Co. (GM) -- New Covered Calls Position
The transactions were:
05/25/2017 Bought 400 GM shares @ $32.20
05/25/2017 Sold 4 GM Jun2017 $31.50 Call options @ $1.10
Note: a simultaneous buy/write transaction was executed.
06/07/2017 Upcoming ex-dividend of $.38 per share
Two possible overall performance results (including commissions) for this General Motors covered calls position are as follows:
Stock Purchase Cost: $12,884.95
= ($32.20*400+$4.95 commission)
(a) Options Income: +$437.40
= ($1.10*400 shares) - $2.60 commissions
(b) Dividend Income (If option exercised early on business day prior to June 7th ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at Jun2017 expiration): +$152.00
= ($.38 dividend per share x 400 shares)
In this instance, assignment at Jun2017 options expiration provides a slightly higher annualized return, so that outcome is preferable -- but either outcome would provide a very attractive return-on-investment result. These returns will be achieved as long as the stock is above the $31.50 strike price at assignment. If the stock declines below the strike price at expiration, the breakeven price of $30.72 ($32.20 -$.38 -$1.10) provides 4.6% downside protection below today's purchase price.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the June 16th, 2017 options expiration) for this GM position is 66.8%. This compares with a probability of profit of 50.2% for a buy-and-hold of this GM stock over the same time period. Using this probability of profit of 66.8%, the expected value annualized return-on-investment (if held until expiration) is +25.1% (+37.5% maximum potential annualized return on investment * 66.8%), a very attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $32.92 ($32.20 - $.38 + $1.10). This is the price above which it would have been more profitable to simply buy-and-hold GM stock until the Jun2017 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 General Motors position, ten of eleven criteria were achieved.