A potential return-on-investment result is +2.24% absolute return in 36 days (equivalent to a +22.7% annualized return-on-investment if assigned at expiration).
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
Because of Put/Call parity, Covered Calls and Cash-Secured Puts are synthetically equivalent strategies (when done at the same strike price for the same expiration date). However, subtle and temporary differences often exist, so just prior to executing the transactions, a comparison is made to see which strategy provides a better potential return. For Delta, the chart below shows that the potential annualized return of +22.7% for the Covered Calls position is preferable to the +21.6% for a 100% Cash-Secured Puts position in this instance:
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 "NO*" with an indication that "If 'YES' then consider avoiding position". The "NO" in this case means that Delta does not have a quarterly earnings report prior to the options expiration.
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 Delta 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 assess whether the pre-determined criteria are met to justify establishing a covered calls position for Delta. 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, all eleven criteria are achieved for this Delta Air Lines Inc. position.
The detailed transactions and calculations are as follows:
11/10/2017 Bought 500 Delta Air Lines Inc. shares @ $49.19
11/10/2017 Sold 5 DAL Dec 15, 2017 $47.00 Call options @ $2.86
The Call options Open Interest was 680 contracts when this position was established and their Implied Volatility was 26.9
Note: this was a simultaneous buy/write transaction.
11/16/2017 Upcoming $.305 ex-dividend
A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares DAL: $23,138.30
= ($49.12 -$2.86)*500 + $8.30 commissions
(a) Options Income: +$1,430.00
= ($2.86*500 shares)
(b) Dividend Income: +$152.50
= $.305 per share x 500 shares
(c) Capital Appreciation (If DAL is above $47.00 strike price at Dec 15th expiration): -$1,064.95
= ($47.00-$49.12)*500 shares - $4.95 commissions
Total Net Profit (If DAL is above $47.00 strike price at Dec 15, 2017 options expiration): +$532.45
= (+$1,430.00 options income +$152.50 dividends -$1,050.05 capital appreciation)
Absolute Return: +2.3%
Annualized Return: +23.3%
= (+$532.45/$23,138.30)*(365/36 days)
The downside 'breakeven price' at expiration is at $45.955 ($49.12 - $2.86 -$.305), which is 6.4% below the current market price of $49.12.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Dec 15th, 2017 options expiration) for this Delta Air Lines covered calls position is 70.3%, so the expected value annualized ROI of this investment (if held until expiration) is +16.4% (+23.3% * 70.3%), an attractive result for this moderately in-the-money covered calls position.
The 'crossover price' at expiration is $51.675 ($49.12 + $2.86 -$.305). This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until December 15th (the December monthly options expiration date) rather than establishing this Covered Calls position.