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Friday, November 17, 2017

Established Covered Calls Position in The Coca-Cola Company

Today, a new Covered Calls position was established in The Coca-Cola Company (ticker KO) at the $45.00 strike price and for the December 15th, 2017 options expiration date.

As detailed below, a potential return-on-investment is +1.4% absolute return in 29 days (equivalent to a +17.7% annualized return-on-investment).  This return includes a $.37 per share quarterly ex-dividend on November 30th plus a potential time value (i.e. extrinsic value) profit of $.27 [$.69 options income - ($45.42 stock cost - $45.00 strike price)]. 


The Coca-Cola Company (KO) -- New Covered Calls Position
The transactions were as follows:
11/17/2017 Bought 400 shares of The Coca-Cola Company stock @ $45.42 per share 
11/17/2017 Sold 4 Coca-Cola Dec 15th, 2017 $45.00 Call options @ $.69 per share
Note: this was a simultaneous Buy/Write transaction
11/30/2017 Upcoming Ex-Dividend of $.37 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $17,899.63
= ($45.42 - $.69)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$276.00
= ($.69* 400 shares)
(b) Dividend Income: +$148.00
= $.37 per share * 400 shares 
(c) Capital Appreciation (If Coca-Cola stock is above $45.00 strike price at Dec 15th expiration): -$172.95
= ($45.00 -$45.42)* 400 shares - $4.95 commission

Total Net Profit: +$251.05
= (+$276.00 options income +$148.00 dividend income -$172.95 capital appreciation)

Absolute Return: +1.4%
= +$251.05/$17,899.63
Equivalent Annualized Return: +17.7%
= (+$251.05/$17,899.63)*(365/29 days)

The downside 'breakeven price' at expiration is at $44.36 ($45.42 stock price - $.69 options income - $.37 dividend income), which is 2.3% below the current market price of $45.42.

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