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Saturday, July 1, 2017

Early Assignment of JPMorgan Chase & Co. Covered Calls

Early this morning I received email and text notifications from my broker (Schwab) that the 4 JPMorgan Chase & Co. (ticker symbol JPM) Call options were exercised early, so the 400 shares of JPM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $82.50 strike price. 

Details of the transactions and the result for this JPMorgan Chase position are provided below.  The per share price had increased from $84.73 when the position was originally established (on May 30th) to $91.40 at yesterday's market close.  The time value remaining in the Call options (based on the $9.10 midpoint of the $8.80/$9.40 bid/ask spread at the market close yesterday) was $.20 [$9.10- ($91.40 - $82.50)] and the Call owners exercised their option to buy the shares in order to capture the dividend.

There are two reasons that I preferred this outcome (i.e. early assignment) instead of keeping the covered calls position and capturing the upcoming $.50 per share ex-dividend on Monday:
  • Early assignment resulted in  a somewhat higher annualized return-on-investment (16.1% achieved) rather than if the position had instead been assigned on the July 21st options expiration date which (including the $.50 per share dividend) would have resulted in a 13.8% annualized ROI; and
  • JPMorgan Chase & Co. will report their 2nd quarter earnings on July 14th which is prior to the July 21st options expiration date.  Because of the uncertainty associated with earnings reports, the Covered Calls Advisor prefers to avoid holding positions on earnings reporting days.
As detailed below, the actual return-on-investment result achieved for this JPMorgan Chase & Co. position was a +1.4% absolute return (equivalent to +16.1% annualized return) for the 32 days this position was held.  The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new covered calls position is established, the transactions details of which will be posted on this blog site the same day that they occur.

JPMorgan Chase & Co. -- Position Closed
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
06/30/2017 4 JPM July 21, 2017 Call options exercised, so 400 shares of JPM sold at $82.50 strike price

The overall performance result (including commissions) for this JPM covered calls position were 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: +$0.00
(c) Capital Appreciation (JPM stock assigned early on June 30th): -$896.95
+($82.50-$84.73)*400 - $4.95 commissions

Total Net Profit: +$479.50
= (+$1,376.45 +$0.00 -$896.95)

Absolute Return: +1.4%
= +$479.50/$33,896.95
Annualized Return: +16.1%
= (+$479.50/$33,896.95)*(365/32 days)