Today, a covered calls position was established in Range Resources Corp. (ticker symbol RRC) with an August 18, 2017 expiration. Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $21.00 slightly below the stock purchase price of $21.65.
As detailed below, there is potential for a +2.7% absolute
return in 24 days (equivalent to a +41.0% annualized
return-on-investment). This potential result substantially exceeds the Covered Calls Advisor's desired
threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks.
Range Resources Corp. (RRC) -- New Covered Calls Position
07/26/2017 Bought 500 Range Resources Corp. shares @ $21.65
07/26/2017 Sold 5 RRC Aug 18, 2017 $21.00 Call options @ $1.25
Note: this was a simultaneous buy/write transaction.
A possible overall performance result (including commissions) would be as follows:
Bought 500 shares RRC: $10,829.95
= $21.65*500 + $4.95 commission
(a) Options Income: +$621.75
= ($1.25*500 shares) - $3.25 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $21.00 strike price at Aug 18th expiration): -$329.95
= ($21.00-$21.65)*500 shares - $4.95 commissions
Total Net Profit (If RRC is above $21.00 strike price at Aug 18, 2017 options expiration): +$291.80
= (+$621.75 options income +$0.00 dividends -$329.95 capital appreciation)
Absolute Return: +2.7%
Annualized Return: +41.0%
= (+$291.80/$10829.95)*(365/24 days)
The downside 'breakeven price' at expiration is at $20.40 ($21.65 - $1.25), which is 5.8% (.55 standard deviations) below the current market price of $21.65. A recent quantitative study titled "Which Index Options Should You Sell" link provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell. Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options at -0.5 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy. For this Range Resources position, the $21.00 front month option was chosen since its breakeven price is -0.55 standard deviations from the current price of $21.65.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Aug 18th, 2017 options expiration) for
this Range Resources Corp. covered calls position is 65.5%. This compares with a
profit of 50.3% for a buy-and-hold of Range Resources stock over the same
Using this probability of profit of 65.5%, the Expected Value annualized
ROI of this investment (if held until expiration) is +26.9% (+41.0% *
65.5%), a very attractive result for this in-the-money covered calls position.
The 'crossover price' at expiration is $22.90 ($21.65 + $1.25). This is the price above which it would have been more profitable to simply buy-and-hold Range Resources stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.