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Tuesday, May 30, 2017

Established Covered Calls Position in JPMorgan Chase & Co.

Today, a covered calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) with a July 2017 expiration and at the $82.50 strike price.  This position has an upcoming quarterly ex-dividend on July 3rd 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 July 21st options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is +1.4% absolute return (equivalent to +16.1% annualized return for the next 32 days) if the stock is assigned early (business day prior to July 3rd ex-date); OR +2.0% absolute return (equivalent to +13.8% annualized return over the next 53 days) if the stock is assigned on the July 21, 2017 options expiration date.

JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend occurs on July 3rd for $.50.  If the current time value (i.e. extrinsic value) of $1.23 [$3.46 option premium - ($84.73 stock price - $82.50 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by June 30th (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:
05/30/2017 Bought 400 JPM shares @ $84.73
05/20/2017 Sold 4 JPM Jul2017 $82.50 Call options @ $3.46
Note: a simultaneous buy/write transaction was executed.
07/03/2017 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: $33,896.95
= ($84.73*400+$4.95 commission)

Net Profit:
(a) Options Income: +$1,376.45
= ($3.46*400 shares) - $7.55 commissions
(b) Dividend Income (If option exercised early on June 30th, the business day prior to July 3rd ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Jul2017 expiration): +$200.00
= ($.50 dividend per share x 400 shares)
(c) Capital Appreciation (If JPM assigned early on June 30th): -$896.95
+($82.50-$84.73)*400 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $82.50 strike price at Jul2017 expiration): -$896.95
+($82.50-$84.73)*400 - $4.95 commissions

1. Total Net Profit [If option exercised on June 30th (business day prior to July 3rd ex-dividend date)]: +$479.50
= (+$1,376.45 +$0.00 -$896.95); or
2. Total Net Profit (If JPM assigned at $82.50 at Jul2017 expiration): +$679.50
= (+$1,376.45 +$200.00 -$896.95)

1. Absolute Return [If option exercised on Jun 30th (business day prior to ex-dividend date)]: +1.4%
= +$479.50/$33,896.95
Annualized Return (If option exercised early): +16.1%
= (+$479.50/$33,896.95)*(365/32 days); or
2. Absolute Return (If JPM assigned at $82.50 at Jul2017 expiration): +2.0%
= +$679.50/$33,896.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +13.8%
= (+$679.50/$33,896.95)*(365/53 days)

Either outcome provides a satisfactory return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $82.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $80.77 ($84.73 -$3.46 -$.50) provides 4.7% 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 desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, eight of the eleven criteria are achieved for this JPMorgan position.