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Friday, October 13, 2017

Covered Calls Established for CVS Health Corporation

Today, a Covered Calls positions was established in CVS Health Corporation (ticker CVS).  Given the Covered Calls Advisor's current cautious overall market outlook, a moderately in-the-money Covered Calls position was established with the November 17th, 2017 $70.00 Call options when the stock price was $72.84.  This $70.00 strike price is -0.5 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  Also, there is an upcoming $.50 ex-dividend prior to the options expiration date which is taken into consideration in the details presented below.

As detailed below, some potential return-on-investment results are:
  • A +1.65% absolute return (equivalent to +60.1% annualized return for the next 10 days) if the stock is assigned early (business day prior to the October 23rd ex-div date); OR 
  • A +2.37% absolute return (equivalent to +24.0% annualized return over the next 36 days) if the stock is assigned on the Nov 17th, 2017 options expiration date.
Either result exceeds the Covered Calls Advisor's target for a greater than +20% potential annualized return-on-investment.

1. CVS Health Corporation (CVS) -- New Covered Calls Position
As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its synthetically equivalent short 100% Cash-Secured Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "YES*" with an indication that "If 'YES' then consider avoiding position".  This position was established because of the Covered Calls Advisor's confidence that analysts' expectations that upcoming earnings per share will be achieved as well as the relatively narrow range of those estimates. 
Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that CVS will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a Covered Calls position in CVS.

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, ten of the eleven criteria are achieved for this CVS Covered Calls position.

For this position, the downside 'breakeven price' at expiration is at $68.35 ($72.84 - $3.99 -$.50), which is 6.2% below the current market price of $72.84. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this CVS Covered Calls position is 68.8%, so the expected value annualized ROI of this investment (if held until expiration) is +16.5% (+24.0% * 68.8%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $76.33 ($72.84 + $3.99 -$.50).  This is the price above which it would have been more profitable to simply buy-and-hold CVS stock until Nov 17th (the November monthly options expiration date) rather than establishing this Covered Calls position.

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