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Monday, August 21, 2017

Established Covered Calls Positions in Micron Technology Inc. and Voya Financial Inc.

Today, two new Covered Calls positions were established in Micron Technology Inc. and Voya Financial Inc.(ticker VOYA).  The Micron position was established when the stock price was $29.71 and the September 15th, 2017 $28.00 Calls were sold at $2.29.   The Voya stock was purchased at $36.94 and the Sept 15th $36.00 Calls were sold at $1.54.   Both positions are relatively conservative since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral -- Micron has 5.8% downside protection to the strike price and Voya has 2.5%.

As detailed below, the potential returns are:
  • Micron Technology Inc. -- +2.1% absolute return in 26 days (equivalent to a +29.3% annualized return-on-investment). 
  • Voya Financial Inc. -- +1.7% absolute return in 26 days (equivalent to a +23.5% annualized return-on-investment). 
  • Both of these positions exceed the Covered Calls Advisor's desired threshold of >20% returns.


    1. Micron Technology Inc. (MU) -- New Covered Calls Position
    The implied volatility of the Call options was 40.3 when this position was established.    

    The transactions were as follows:
    08/21/2017 Bought 600 shares of Micron @ $29.71 
    08/21/2017 Sold 6 MU Sept 15, 2017 $28.00 Call options @ $2.29
    Note: this was a simultaneous Buy/Write transaction


    A possible overall performance result (including commissions) would be as follows:
    Cost Basis: $16,460.97
    = ($29.71 - $2.29)* 600 shares + $8.97 commission

    Net Profit:
    (a) Options Income: +$1,374.00
    = ($2.29* 600 shares)
    (b) Dividend Income: +$0.00 
    (c) Capital Appreciation (If Micron is above $28.00 strike price at Sept 15th expiration): -$1,030.95
    = ($28.00-$29.71)* 600 shares - $4.95 commission

    Total Net Profit (If MU stock price is above $28.00 strike price at Sept 15th options expiration): +$343.05
    = (+$1,374.00 options income +$0.00 dividend income -$1,030.95 capital appreciation)

    Absolute Return: +2.1%
    = +$343.05/$16,460.97
    Annualized Return: +29.3%
    = (+$343.05/$16,460.97)*(365/26 days)

    The downside 'breakeven price' at expiration is at $27.42 ($29.71 - $2.29), which is 7.7% below the current market price of $29.71.

    The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Micron Technology Covered Calls position is 72.6%. This compares with a probability of profit of 50.2% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 72.6%, the expected value annualized return-on-investment (if held until expiration) is +21.3% (+29.3% * 72.6%), a satisfactory risk/reward profile for this relatively conservative investment.  

    The 'crossover price' at expiration is $32.00 ($29.71 + $2.29).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the Sept 15th, 2017 options expiration date.


     
    2. Voya Financial Inc. (VOYA) -- New Covered Calls Position
    The implied volatility of the Call options was 23.9 when this position was established; so the $1.54 per share received is a nice premium received for these in-the-money (i.e. strike price below the current stock price) Call options.    

    The transactions were as follows:
    08/21/2017 Bought 300 shares VOYA @ $36.94 
    08/21/2017 Sold 3 VOYA Sept 15, 2017 $36.00 Call options @ $1.54
    Note: this was a simultaneous Buy/Write transaction
    08/29/2017 Upcoming $.01 per share ex-dividend

    A possible overall performance result (including commissions) would be as follows:
    Cost Basis: $10,626.96
    = ($36.94 - $1.54)*300 shares + $6.96 commission

    Net Profit:
    (a) Options Income: +$462.00
    = ($1.54*300 shares)
    (b) Dividend Income: +$3.00 = $.01 dividend x 300 shares 
    (c) Capital Appreciation (If VOYA is above $36.00 strike price at Sept 15th expiration): -$286.95
    = ($36.00-$36.94)*300 shares - $4.95 commission

    Total Net Profit (If VOYA stock price is above $36.00 strike price at Sept 15th options expiration): +$178.05
    = (+$462.00 options income +$3.00 dividend income -$286.95 capital appreciation)

    Absolute Return: +1.7%
    = +$178.05/$10,626.96
    Annualized Return: +24.2%
    = (+$178.05/$10,626.96)*(365/26 days)

    The downside 'breakeven price' at expiration is at $35.41 ($36.96 - $.01 - $1.54), which is 4.1% below the current market price of $36.94.

    The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Voya Covered Calls position is 66.4%. This compares with a probability of profit of 50.3% for a buy-and-hold of VOYA shares over the same time period. Using this probability of profit of 66.4%, the expected value annualized return-on-investment (if held until expiration) is +16.1% (+24.2% * 66.4%), a satisfactory risk/reward profile for this relatively conservative investment.  

    The 'crossover price' at expiration is $38.47 ($36.94 - $.01 + $1.54).  This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the Sept 15th, 2017 options expiration date instead of holding this Covered Calls position.

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