Search This Blog

Wednesday, October 11, 2017

Covered Calls Position Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel (ticker symbol X).  This was established when the stock price was $24.69 and eight October 20th, 2017 $24.00 Calls were sold at $1.05.   U.S. Steel has 2.9% downside protection to the $24.00 strike price, a conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral. 


As detailed below, the potential return-on-investment is +1.5% absolute return in 10 days (equivalent to a +54.6% annualized return-on-investment).  


United States Steel (X) -- New Covered Calls Position
The implied volatility of the Call options was 39.5 when this position was established, a very high level considering that there is no earnings report prior to the Oct. 20th expiration date.
The transactions were as follows:
10/11/2017 Bought 800 shares of United States Steel stock @ $24.69 per share 
10/11/2017 Sold 8 US Steel October 20th, 2017 $24.00 Call options @ $1.05 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,922.31
= ($24.69 - $1.05)* 800 shares + $10.31 commission

Net Profit:
(a) Options Income: +$840.00
= ($1.05* 800 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If USS is above $24.00 strike price at Oct 20th expiration): -$556.95
= ($24.00 -$24.69)* 800 shares - $4.95 commission

Total Net Profit (If US Steel stock price is above $24.00 strike price at Oct 20th options expiration): +$283.05
= (+$840.00 options income +$0.00 dividend income -$556.95 capital appreciation)

Absolute Return: +1.5%
= +$283.05/$18,922.31
Annualized Return: +54.6%
= (+$283.05/$18,922.31)*(365/10 days)

The downside 'breakeven price' at expiration is at $23.64 ($24.69 - $1.05), which is 4.3% below the current market price of $24.69.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this U.S. Steel Covered Calls position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of US Steel shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +37.0% (+54.6% * 67.8%).  

The 'crossover price' at expiration is $25.74 ($24.69 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold US Steel stock until the October 20th, 2017 options expiration date.

No comments:

Post a Comment