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Tuesday, December 26, 2017

Established Covered Calls Position in JPMorgan Chase & Co.

Today, a Covered Calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) with a January 19th, 2018 expiration and at the $104.00 strike price.  This position has an upcoming quarterly ex-dividend on Jan 4th of $.56 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the Jan 19th, 2018 options expiration date.  The next quarterly earnings report is January 12th.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Neutral, a slightly in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +0.7% absolute return (equivalent to +24.9% annualized return for the next 10 days) if the stock is assigned early (business day prior to January 4th ex-date); OR +1.2% absolute return (equivalent to +17.9% annualized return over the next 25 days) if the stock is assigned on the January 19th options expiration date.


JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend occurs on January 4th for $.56 per share.  Although unlikely, if the current time value (i.e. extrinsic value) of $.78 [$3.46 option premium - ($106.68 stock price - $104.00 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by Jan 3rd (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 200 JPM shares away to capture the dividend payment.

The transactions were:
12/26/2017 Bought 200 JPM shares @ $106.68
12/26/2017 Sold 2 JPM 1/19/2018 $104.00 Call options @ $3.46
Note: a simultaneous buy/write transaction was executed.
01/03/2018 Upcoming quarterly ex-dividend of $.56 per share

Two possible overall performance results (including commissions) for this JPM covered calls position are as follows:
Stock Purchase Cost: $20,646.95
= ($106.68 - $3.46) *200 + $4.95 commission

Net Profit:
(a) Options Income: +$685.71
= ($3.46*200 shares) - $6.29 commissions
(b) Dividend Income (If option exercised early on January 3rd, the business day prior to Jan 4th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Jan 19th, 2018 expiration): +$112.00
= ($.56 dividend per share x 200 shares)
(c) Capital Appreciation (If JPM assigned early on Jan 3rd): -$540.95
+($104.00-$106.68)*200 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $104.00 strike price): -$540.95
+($104.00-$106.68)*200 - $4.95 commissions

1. Total Net Profit [If option exercised on Jan 3rd (business day prior to January 4th ex-dividend date)]: +$140.76
= (+$681.71 +$0.00 -$540.95); or
2. Total Net Profit (If JPM assigned at $104.00 at Jan 19, 2018 expiration): +$252.76
= (+$681.71 +$112.00 -$540.95)

1. Absolute Return [If option exercised on Jan 3rd (business day prior to ex-dividend date)]: +0.7%
= +$140.76/$20,646.95
Annualized Return (If option exercised early): +24.9%
= (+$140.76/$20,646.95)*(365/10 days); or
2. Absolute Return (If JPM assigned at $104.00 at Jan 19, 2018 expiration): +1.2%
= +$252.76/$20,646.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +17.9%
= (+$252.76/$20,646.95)*(365/25 days)

Either outcome provides a satisfactory return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $104.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $102.66 ($106.68 -$3.46 -$.56) provides 3.8% downside protection below today's purchase price.

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, only seven of the eleven criteria are achieved for this JPMorgan position.


2 comments:

  1. Interesting that you are writing a call through an earnings report. Is this something you typically do, as most CC writers tend to avoid stocks reporting earnings.

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    Replies
    1. Hi Mark,

      Thanks for writing and for your very good question.

      I am unaware of any studies that have estimated the percent of Covered Calls investors that avoid earnings report dates, so please let me know if you have seen any. But having said that, I do always consider when the next earnings reporting date is and often avoid establishing CC positions with intervening earnings.

      However, since the Implied Volatility in these options are higher than they would be without upcoming earnings, it is sometimes advantageous to do so to capture the higher options income (and therefore the higher potential return-on-investment) available there.

      I say "sometimes" because I will only do so for companies where I have a reasonably high confidence that their earnings will beat or exceed analysts' expectations. As we know, JPM is widely followed (by 32 analysts tracked by Reuters Research). I am reasonably confident in JPM's earnings report on Jan 12th since they have exceeded the analysts' average earnings estimates in every one of the last 11 quarters and by an average of 8.1% for the last 4 quarters. Also relevant is that the Jan 12th earnings are after the Jan 4th ex-dividend date and also 1 week prior to the Jan 19th options expiration, so the opportunity exists to capture the dividend and still exit the position prior to the earnings release if I choose to do so.

      Best Regards,
      Jeff

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