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Monday, August 28, 2017

Covered Calls Established in MGM Resorts International and Nucor Corp.

Today, two covered calls positions were established in MGM Resorts International (ticker symbol MGM) and Nucor Corp. (NUE).  The September 15th expiration was chosen for the MGM position and the October 20, 2017 expiration for the Nucor position.  Given the Covered Calls Advisor's current cautious overall market outlook, moderately in-the-money covered calls positions were established in each instance. Also, there are upcoming ex-dividend dates prior to both options expirations which are also taken into consideration.

Some potential return-on-investment results for each position are: 
  • MGM Resorts International -- A +1.2% absolute return in 19 days (equivalent to a +22.8% annualized return-on-investment if assigned at expiration; or a +0.8% absolute return in 11 days (equivalent to a +27.1% annualized return if assigned the day prior to the September 8th ex-dividend date).    
  • Nucor Corp. -- A +3.2% absolute return in 54 days (equivalent to a +21.8% annualized return-on-investment if assigned at expiration); or a +2.5% absolute return in 31 days (equivalent to a +29.3% annualized return if assigned the day prior to the September 28th ex-dividend date).
Detailed transactions and possible return-on-investment results for both positions are provided below.
 
1. MGM Resorts International -- New Covered Calls Position
The transactions were as follows:
08/28/2017  Bought 700 MGM Resorts International shares @ $31.56
08/28/2017 Sold 7 MGM Sept 15, 2017 $30.00 Call options @ $1.81 and the implied volatility of these options was 29.2 when this buy/write transaction was executed.
09/08/2017 Upcoming $.11 per share ex-dividend.

Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 700 shares MGM: $20,834.64
= ($31.56 -$1.81)*700 + $9.64 commissions

Net Profit:
(a) Options Income: +$1,267.00
= ($1.81*700 shares)
(b) Dividend Income (If assigned at Sept 15th expiration): +$77.00
= $.11 per share x 700 shares; OR
(b) Dividend Income (If assigned early on Sept 7th -- day prior to Sept 8th ex-dividend): $0.00
(c) Capital Appreciation: -$1,096.95
= ($30.00-$31.56)*700 shares - $4.95 commissions

Total Net Profit:
(a)  (If MGM is above $30.00 strike price at Sep 15, 2017 options expiration): +$247.05
= (+$1,267.00 options income +$77.00 dividends -$1,096.95 capital appreciation); OR
(b) (If MGM is called away early on day prior to Sept 8th ex-dividend date): +$170.05
= (+$1,267.00 options income +$0.00 dividends - $1,096.95 capital appreciation)

(a) Absolute Return if Assigned at Expiration: +1.2%
= +$247.05/$20,834.64
Equivalent Annualized Return: +22.8%
= (+$247.05/$20,834.64)*(365/19 days); OR

(b) Absolute Return if Assigned on Sept 7th (day prior to Ex-Dividend): +0.8%
= +$170.05/$20,834.64
Equivalent Annualized Return: +27.1%
= (+$170.05/$20,834.64)*(365/11 days)

The downside 'breakeven price' at expiration is at $29.64 ($54.16 - $2.96 -$.3775), which is 6.1% below the current market price of $31.56. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Sep 15th, 2017 options expiration) for this MGM Covered Calls position is 79.8%, so the expected value annualized ROI of this investment (if held until expiration) is +18.2% (+22.8% * 79.8%), an attractive result for this moderately in-the-money covered calls position.

The 'crossover price' at expiration is $33.26 ($31.56 + $1.81 -$.11).  This is the price above which it would have been more profitable to simply buy-and-hold MGM stock until September 15th (the September monthly options expiration date) rather than establishing this Covered Calls position.



2. Nucor Corp. -- New Covered Calls Position
The transactions were as follows:
08/28/2017  Bought 200 Nucor Corp. shares @ $54.16
08/28/2017 Sold 2 NUE October 20, 2017 $52.50 Call options @ $2.96
Note: this was a simultaneous buy/write transaction.
09/28/2017 Expected upcoming $.3775 ex-dividend per share

Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 200 shares NUE: $10,246.29
= ($54.16 -$2.96)*200 + $6.29 commissions

Net Profit:
(a) Options Income: +$592.00
= ($2.96*200 shares)
(b) Dividend Income (If assigned at Oct 20th expiration): +$75.50
= $.3775 per share x 200 shares; OR
(b) Dividend Income (If assigned early on Sept 27th -- day prior to Sept 28th ex-dividend): $0.00
(c) Capital Appreciation (If NUE is above $52.50 strike price at assignment): -$336.95
= ($52.50-$54.16)*200 shares - $4.95 commissions

Total Net Profit:
(a)  (If NUE is above $52.50 strike price at Oct 20, 2017 options expiration): +$330.55
= (+$592.00 options income +$75.50 dividends -$336.95 capital appreciation); OR
(b) (If NUE is called away early on day prior to Sept 28th ex-dividend date): +$255.05
= (+$592.00 options income +$0.00 dividends - $336.95 capital appreciation)

(a) Absolute Return if Assigned at Expiration: +3.2%
= +$330.55/$10,246.29
Equivalent Annualized Return: +21.8%
= (+$330.55/$10,246.29)*(365/54 days); OR

(b) Absolute Return if Assigned on Sept 27th (day prior to Ex-Dividend date): +2.5%
= +$255.05/$10,246.29
Equivalent Annualized Return: +29.3%
= (+$255.05/$10,246.29)*(365/31 days)

The downside 'breakeven price' at expiration is at $50.8225 ($54.16 - $2.96 -$.3775), which is 6.2% below the current market price of $54.16. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Oct 20th, 2017 options expiration) for this Nucor Covered Calls position is 63.0%, so the expected value annualized ROI of this investment (if held until expiration) is +13.7% (+21.8% * 63.0%), an attractive result for this moderately in-the-money covered calls position.

The 'crossover price' at expiration is $56.7425 ($54.16 + $2.96 -$.3775).  This is the price above which it would have been more profitable to simply buy-and-hold Nucor stock until October 20th (the October monthly options expiration date) rather than establishing this Covered Calls position.

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