Search This Blog

Friday, November 10, 2017

Established Covered Calls in Delta Air Lines Inc.

Today, a Covered Calls position was established in Delta Air Lines (DAL) for the December 15th, 2017 options expiration date.  Given the Covered Calls Advisor's current neutral overall market outlook, a moderately in-the-money position was established. Also, there is an upcoming ex-dividend date next week which is taken into consideration in the calculations below.

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).
Details for the Delta Air Lines position are provided below to explain the position further for those interested in understanding the type of thought processes and calculations underlying establishing these Covered Calls positions.
 
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
First and foremost, is is essential to invest only in companies that you are bullish about.  Delta meets the Covered Calls Advisor's key quality, value, and growth metrics.  My bullish sentiment is shared by many respected analysts including their highest rating category by Argus, CFRA, and the Average Analysts' Ratings as reported by Reuters.  Also, as shown below, the potential rate-of-return exceeds the Covered Calls Advisor's desired threshold of +20% annualized return if assigned at expiration.  Another positive is the industry high annual dividend yield of 2.5% and this Covered Calls position is likely to capture Delta's next quarterly $.305 ex-dividend next week.

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

Net Profit:
(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%
= +$532.45/$23,138.30
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.

8 comments:

  1. Do you work off a basket of stocks you are familiar / comfortable with or are screening against the entire population? Thanks.

    ReplyDelete
    Replies
    1. Hi Chris,
      The entire population. I have developed several custom screeners using my broker's (Schwab's) online Screener software to narrow down the list of candidates for potential investment.

      Delete
    2. Thanks Jeff.

      I am looking at 2 possible covered calls entries.

      DEC 15th $100 MKSI. Dividend on 11/24. Downside protection ~6%, Max profit 2.2% (not including dividend)

      DEC 15th $25 X. Downside protection ~11%, max profit 2.2%.

      Delete
    3. Thanks Chris.
      Like the U.S. Steel idea, but I need to research further to feel more comfortable with reason why the implied volatility is so high before I take a position.
      Not familiar with MKSI. Please email me at partlow@cox.net if you can refer me to some good research on MKSI to read.

      Delete
  2. Hi Jeff

    Do you trade a virtual account or real money with all positions ?

    Thanks for your good job with covered call

    Giorgio

    ReplyDelete
    Replies
    1. Giorgio,
      Here is an explanation from a prior blog post:
      The Covered Calls Advisor Portfolio is not identical to the advisor's personal portfolio. However, it does provide a comparable overall portfolio return result since all equities in the CCAP are also held in this advisor's personal portfolio. To ensure comparability, all transaction dates and transaction prices herein are identical to those that were established in the Covered Calls Advisor's personal portfolio. The primary difference between the two accounts is the total number of shares held for each equity. This approach is used to preserve the confidentiality of the total value of the Covered Call Advisor's personal portfolio.

      Delete
  3. Great blog.. thank you so much for sharing.. excellent! -Conrad

    ReplyDelete
  4. Excellent work.. Thank you Jeff!

    ReplyDelete