Tuesday, February 28, 2017

Established Covered Calls in General Motors Co. and Magna International Inc.

Today, two new covered calls positions were established in General Motors Co. (ticker symbol GM) and Magna International Inc. (ticker MGA), both with Mar2017 expirations.  Both positions have upcoming quarterly ex-dividends on March 8th, so the potential returns for these positions detailed below includes the possibility of early exercise because of these ex-dividends prior to the March 17th options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, in-the-money covered calls were established. 

As detailed below, potential return-on-investment results for these positions are: 
1. General Motors:
If Early Assignment: +0.8% absolute return (equivalent to +33.6% annualized return for the next 9 days) if the stock is assigned early (business day prior to Mar 8th ex-date); OR
If Dividend Capture: +1.9% absolute return (equivalent to +37.7% annualized return over the next 18 days) if the stock is assigned at the Mar2017 expiration on March 17th.
2.  Magna International Inc.:
If Early Assignment: +0.8% absolute return (equivalent to +31.6% annualized return for the next 9 days) if the stock is assigned early (business day prior to Mar 8th ex-date); OR
If Dividend Capture: +1.4% absolute return (equivalent to +28.6% annualized return over the next 18 days) if the stock is assigned at the Mar2017 expiration on March 17th. 


1. General Motors Co. (GM) -- New Covered Calls Position
The $.38 dividend of Mar 8th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.32 [$1.22 option premium - ($36.90 stock price - $36.00 strike price)] remaining in the short call option decays to about $.10 or less by March 7th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the General Motors shares away to capture the dividend.

The transactions were:
02/28/2017 Bought 1,000 GM shares @ $36.90
02/28/2017 Sold 10 GM Mar2017 $36.00 Call options @ $1.22
Note: a simultaneous buy/write transaction was executed.
03/08/2017 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this General Motors covered calls position are as follows:
Stock Purchase Cost: $36,906.95
= ($36.90*1,000+$6.95 commission)

Net Profit:
(a) Options Income: +$1,213.00
= ($1.22*1,000 shares) - $7.00 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 8th ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at Mar2017 expiration): +$380.00
= ($.38 dividend per share x 1,000 shares)
(c) Capital Appreciation (If GM assigned early on Mar 7th): -$906.95
+($36.00-$36.90)*1,000 - $6.95 commissions; or
(c) Capital Appreciation (If GM assigned at $36.00 at Mar2017 expiration): -$906.95
+($36.00-$36.90)*1,000 - $6.95 commissions

Total Net Profit (If option exercised on day prior to Mar 8th ex-dividend date): +$306.05
= (+$1,213.00 +$0.00 -$906.95); or
Total Net Profit (If GM assigned at $36.00 at Mar2016 expiration): +$686.05
= (+$1,213.00 +$380.00 -$906.95)

1. Absolute Return [If option exercised on Mar 7th (business day prior to ex-dividend date)]: +0.8%
= +$306.05/$36,906.95
Annualized Return (If option exercised early): +33.6%
= (+$306.05/$36,906.95)*(365/9 days); OR

2. Absolute Return (If GM assigned at $36.00 at Mar2017 expiration): +1.9%
= +$686.05/$36,905.95
Annualized Return: +37.7%
= (+$686.05/$36,905.95)*(365/18 days)

In this instance, assignment at Mar2017 options expiration provides a slightly higher annualized return, so that outcome is preferable -- but either outcome would provide a very good return-on-investment result.  These returns will be achieved as long as the stock is above the $36.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $35.30 ($36.90 -$.38 -$1.22) provides 4.3% downside protection below today's purchase price.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 17th, 2017 options expiration) for this GM position is 68.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of this GM stock over the same time period. Using this probability of profit of 68.5%, the expected value annualized return-on-investment (if held until expiration) is +25.8% (+37.7% maximum potential annualized return on investment * 68.5%), a very attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $37.74 ($36.90 - $.38 + $1.22).  This is the price above which it would have been more profitable to simply buy-and-hold GM stock until the Mar2017 options expiration date rather than selling these Put options.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a potential for dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this General Motors position, ten of eleven criteria were achieved.




























2. Magna International Inc. (MGA) -- New Covered Calls Position
The $.275 dividend of Mar 8th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.36 [$1.35 option premium - ($43.49 stock price - $42.50 strike price)] remaining in the short call option decays to about $.10 or less by March 7th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Magna shares away to capture the dividend.

The transactions were:
02/28/2017 Bought 500 MGA shares @ $43.49
02/28/2017 Sold 5 MGA Mar2017 $42.50 Call options @ $1.35
Note: a simultaneous buy/write transaction was executed.
03/08/2016 Upcoming ex-dividend of $.275 per share

Two possible overall performance results (including commissions) for this Magna International covered calls position are as follows:
Stock Purchase Cost: $21,751.95
= ($43.49*500+$6.95 commission)

Net Profit:
(a) Options Income: +$671.50
= ($1.35*500 shares) - $3.50 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 8th ex-div date): +$0.00; or
(b) Dividend Income (If MGA assigned at Mar2017 expiration): +$137.50
= ($.275 dividend per share x 500 shares)
(c) Capital Appreciation (If MGA assigned early on Mar 7th): -$501.95
+($42.50-$43.49)*500 - $6.95 commissions; or
(c) Capital Appreciation (If MGA assigned at $42.50 at Mar2017 expiration): -$501.95
+($42.50-$43.49)*500 - $6.95 commissions

Total Net Profit (If option exercised on day prior to Mar 8th ex-dividend date): +$169.55
= (+$671.50 +$0.00 -$501.95); or
Total Net Profit (If MGA assigned at $42.50 at Mar2017 expiration): +$307.05
= (+$671.50 +$137.50 -$501.95)

1. Absolute Return [If option exercised on Mar 7th (business day prior to ex-dividend date)]: +0.8%
= +$169.55/$21,751.95
Annualized Return (If option exercised early): +31.6%
= (+$169.55/$21,751.95)*(365/9 days); OR

2. Absolute Return (If MGA assigned at $42.50 at Mar2017 expiration): +1.4%
= +$307.05/$21,751.95
Annualized Return: +28.6%
= (+$307.05/$21,751.95)*(365/18 days)

In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a good return-on-investment result.  These returns will be achieved as long as the stock is above the $42.50 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $41.865 ($43.49 -$.275 -$1.35) provides 3.7% downside protection below today's purchase price.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 17th, 2017 options expiration) for this Magna position is 68.4%. This compares with a probability of profit of 50.2% for a buy-and-hold of this MGA stock over the same time period. Using this probability of profit of 68.4%, the expected value annualized return-on-investment (if held until expiration) is +19.6% (+28.6% maximum potential annualized return on investment * 68.4%), a nice risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $44.565 ($43.49 - $.275 + $1.35).  This is the price above which it would have been more profitable to simply buy-and-hold MGA stock until the Mar2017 options expiration date rather than selling these Put options.


The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this Magna position, all eleven criteria were achieved.

Thursday, February 23, 2017

Established New Position in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor established a new position in Alibaba Group Holding Ltd. (ticker symbol BABA) by selling five Mar2017 Put options at the $100.00 strike price. This position is a conservative one since it was established when the price of Alibaba was $102.77 (2.7% downside protection to the strike price) and 23 calendar days remaining until the options expiration date.

As detailed below, the Alibaba Group Holding Ltd. investment will yield a +1.25% absolute return in 23 days (which is equivalent to a +19.9% annualized return-on-investment) if Alibaba stock closes above the $100.00 strike price on the March 17th options expiration date. 

The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the five Put options sold.

Alibaba Group Holding Ltd (BABA) --New 100% Cash-Secured Put Options Position
The transaction was as follows:
02/23/2017  Sold 5 BABA 100% cash-secured $100.00 Put options with Mar2017 expirations @ $1.26
Note: the price of Alibaba was $102.77 today when this transaction was executed.

A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $50,000.00
= $100.00*500

Net Profit:
(a) Options Income: +$626.50
= ($1.26 * 500 shares) - $3.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA closes above $100.00 strike price at Mar2017 expiration): +$0.00
= ($100.00 -$100.00)*500 shares

Total Net Profit: +$626.50
= (+$626.50 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.25%
= +$626.50/$50,000.00
Annualized Return: +19.9%
= (+$626.50/$50,000.00)*(365/23 days)

The downside 'breakeven price' at expiration is at $98.74 ($100.00 - $1.26), which is 3.9% below the current market price of $102.77.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 17th, 2017 options expiration) for this Alibaba short Puts position is 69%. This compares with a probability of profit of 50.2% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 69%, the expected value annualized return-on-investment (if held until expiration) is +13.7% (+19.9% maximum potential annualized return on investment * 69%), an attractive risk/reward profile for this somewhat conservative investment.  
The 'crossover price' at expiration is $104.03 ($102.77 + $1.26).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Mar2017 options expiration date rather than selling these Put options.

Tuesday, February 21, 2017

Where Are We Now on the Emotional Roller Coaster of Investing?

Periodically, I like to re-visit the Emotional Roller Coaster of Investing to think about where we are in the cycle. The chart below shows how different emotional states of investors change with the stock market. The green sections are normally bullish times to be invested whereas the red portions are bearish times.










Many studies have documented how individual investors, and even professionals, chase performance. When markets are doing well, investors get less concerned about risk and put their money to work in investments that have been doing well recently. Too often that means investing while looking through a rear view mirror. Unfortunately, that is often opposite of what we should be doing. This reality is confirmed by three of the most renowned investors of the past century:
- "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell" -- John Templeton
- "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful" -- Warren Buffett
- "I have every confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public." -- Benjamin Graham

So, Where Are We Now on the Emotional Roller Coaster of Investing?
It is certainly more of an art than a science, but my own assessment is that we are now in the 'exhiliration' stage. To better understand the various stages, let's consider how investors' emotions have corresponded to our recent stock market history. The bull market 'euphoria' ended in October 2007 when the Dow peaked at slightly about 14,000. During the winter of 2007/2008, 'unease' began to set in as the Dow declined below its 200-day moving average. In the Spring of 2008 a decline in real estate values began to become apparent and investors transitioned to the 'denial' stage since it was so hard to believe that our long-held assumption of neverending increases in the value of real estate then appeared to be in jeopardy. 'Pessimism' ensued as the stock market continued its steady decline into the summer as the credit crunch became more apparent and the price of oil reached $150 per barrel. 'Panic' occurred in the autumn of 2008 with financial bailouts of some large banks; and culminated in the September bankruptcy of Lehman Brothers. The stock markets' steep decline continued through the winter of 2008/2009 with 'capitulation' occurring from late January to early March of 2009 when the market quickly declined by another 20%. Investors were clearly in 'despair' as the Dow reached its closing low of 6,547 on March 9th, 2009. It is said that "Hindsight is 20/20", but that low point turned out to be what John Templeton called "the time of maximum pessimism" and thus "the best time to buy".

During the subsequent almost 8 years since that March 2009 low, the Dow has rebounded 217% to its current all-time high level above 20,700. During this period, the market has been climbing the proverbial "wall of worry". Investors have had 'hope' that the worst was over, but nevertheless continued to fear a return of the bear market. My current belief is that the recent strongly bullish stock market move is signaling the transition from 'enthusiam' to 'exhiliration'. 

If we are now in the 'exhiliration' stage, then the next question would be: What would enable us to move to the next stage of 'euphoria', thus signaling a likely market top? My first caveat is that it is unrealistic to expect to accurately forecast future events, but the single most likely event that could propel the market even higher and into the 'euphoria' stage would be passage this year of a tax reform bill similar to that currently being developed by Congress that would include a reduction in the corporate tax rate from its current 35% level to somewhere in the 20% to 25% range -- a change that would certainly be a substantial benefit to future corporate earnings prospects for many companies currently paying above 30% in Federal taxes.

On the other hand, it is also possible that rather than advancing to the 'euphoria' stage, we could jump directly to 'unease'.  This would most likely occur with continuing Congressional gridlock that results from an inability to obtain approval on a bill that would achieve the proposed reductions in the current corporate and individual tax rates.  This 'unease' would signal an end of this 8-year long bull market.  The current uncertainty and concern that we might be near a market top is also reflected in the Covered Calls Advisor's current Overall Market Meter rating of Slightly Bearish (see right sidebar) as detailed in the most recent post on this topic here: link.  Given the current uncertainty in this regard, a prudent investing stance favors the current recommendation of the Covered Calls Advisor's Overall Market Meter, namely to establish slightly in-the-money Covered Calls (at strike prices below the current stock price).

I hope this article is helpful in stimulating your own thinking about the current state of the market and also the importance of not allowing our emotions to have an adverse effect on our investment decision-making.

Do you agree or disagree that we are now most likely in the 'exhiliration' stage? Why?

As always, I welcome your comments. Please email me at the address shown in the upper-right sidebar.

Godspeed,
Jeff

Continuation of Las Vegas Sands Corp. Position

Upon the February options expiration last Friday, twelve of the thirteen positions were in-the-money and the positions were closed.  The one position that was out-of-the-money (strike price of $52.50 and stock closed Friday at $52.03) was Las Vegas Sands.  So, the five Put options in Las Vegas Sands Corp. (ticker symbol LVS) were assigned and 500 shares of Las Vegas Sands stock were purchased at the $52.50 strike price.  Today, the Covered Calls Advisor continued the LVS investment by establishing a covered calls position by selling five Apr2017 Call options against the 500 LVS shares held. The company has also declared a quarterly dividend of $.73 which will go ex-dividend on March 21st (before the Apr2017 options expiration on Apr 21st).

A potential return-on-investment is +4.0% absolute return (equivalent to +16.6% annualized) for the 88 days of this Las Vegas Sands investment. Details of the transactions to-date including the potential return-on-investment result are provided below:


Las Vegas Sands Corp (LVS) -- Continuation
The transactions are as follows:
01/23/2017 Sold 5 LVS Feb2017 $52.50 Puts @ $.78
Note: The price of LVS was $55.35 when this transaction was executed.
02/17/2017 5 Put options assigned and 500 shares of LVS purchased at the $52.50 strike price.
Note: the price of LVS was $52.03 at market close at Feb2017 options expiration
02/21/2017 Sold 5 LVS Apr2017 $50.00 Call options @ $3.10
Note: the price of LVS was $52.14 when these Call options were sold
03/21/2017 Ex-dividend of $365.00 = 500 shares x $.73 per share
04/21/2017 Future Apr2017 options expiration date

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $26,256.95
= $52.50*500 - $6.95 commission

Net Profit:
(a) Options Income: +$1,933.00
= ($.78 + $3.10) *500 shares) - $7.00 commissions
(b) Dividend Income: +$365.00
= $.73 per share x 500 shares
(c) Capital Appreciation (If LVS is above $50.00 strike price at Apr2017 expiration): -$1,250.00
= ($50.00-$52.50)*500 shares

Total Net Profit (If LVS is above $50.00 strike price upon the Apr2017 options expiration): +$1,048.00
= (+$1,933.00 +$365.00 -$1,250.00)

Absolute Return (If LVS is above $50.00 strike price at Apr2017 options expiration): +4.0%
= +$1,048.00/$26,256.95
Annualized Return: +16.6%
= (+$1,048.00/$26,256.95)*(365/88 days)

For the covered calls position established today, the downside 'breakeven price' at expiration is at $48.31 ($52.14 - $.73 -$3.10), which is 7.3% below the current market price of $52.14.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Apr 21st, 2017 options expiration) for this Las Vegas Sands covered calls position is 63.7%. This compares with a probability of profit of 50.3% for a buy-and-hold of LVS stock over the same time period. Using this probability of profit of 63.7%, the Expected Value annualized ROI of this investment (if held until expiration over the next 60 days) is +13.5% (+21.2% * 63.7%).

The 'crossover price' at expiration is $54.51 ($52.14 + $3.10 - $.73).  This is the price above which it would have been more profitable to simply buy-and-hold Las Vegas Sands stock until April 21st (the Apr2017 options expiration date) rather than establishing this covered calls position.

Saturday, February 18, 2017

February 2017 Option Expiration Results

The Covered Calls Advisor Portfolio (CCAP) for the February 2017 options expiration benefited from the ongoing bull market and good results from those companies in the portfolio that released earnings reports during the past month. 

Twelve of the thirteen Feb2017 positions closed in-the-money at expiration, so the maximum possible return-on-investment result was achieved for each of these twelve positions: Alibaba Group Holdings, Amazon.com Inc., Capital One Financial, Celgene Corporation, Citigroup Inc., Energy Transfer Equity LP, Facebook Inc., Hanes Brands Inc., Hawaiian Holdings Inc., HCA Holdings Inc., JetBlue Airways Corp., and Metlife Inc.

For the other position (Las Vegas Sands Corp.), the price of the stock closed at $52.03 (below the $52.50 strike price). So the short Put options were assigned and 500 shares were purchased at $52.50. The shares will remain in the Covered Calls Advisor Portfolio until they are either sold or a continuation covered calls position is established by selling Mar2017 call options against the shares owned.

I.  For the twelve closed positions:
The return-on-investment results for each position was:
  • Alibaba Group Holdings = +2.6% absolute return (+26.7% annualized return)
  • Amazon.com Inc. = +2.3% absolute return (+22.9% annualized return)
  • Capital One Financial = +0.8% absolute return (+24.9% annualized return)
  • Celgene Corporation = +2.1% absolute return (+30.1% annualized return)
  • Citigroup Inc. = +5.8% absolute return (+68.5% annualized return)
  • Energy Transfer Equity LP = +3.7% absolute return (+70.3% annualized return)
  • Facebook Inc. = +1.6% absolute return (+30.1% annualized return)
  • Hanes Brands Inc. = +3.1% absolute return (+29.8% annualized return)
  • Hawaiian Holdings Inc. = +1.4% absolute return (+15.4% annualized return)
  • HCA Holdings Inc. = +2.0% absolute return (+39.1% annualized return)
  • JetBlue Airways Corp. = +1.9% absolute return (+33.9% annualized return)
  • Metlife Inc. = +1.3% absolute return (+25.0% annualized return)
The cash now available in the Covered Calls Advisor Portfolio from the closing of these positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new positions established with this available cash will be posted on this site on the same day the transactions occur.  As examples of how return-on-investment results are calculated, one short 100% Cash-Secured Put options position (Alibaba) and one Covered Calls position (Capital One Financial) are presented in detail below.  


1. Alibaba Group Holdings -- 100% Cash-Secured Put Options Position Closed at Expiration
The transactions were as follows:
01/12/2017 Sold 4 Feb2017 $92.50 Puts @ $2.46
Note: The price of Alibaba was $95.13 when this transaction was executed.
02/17/2017 4 short BABA options expired
Note: the price of BABA was $100.52 upon options expiration 

The overall performance result (including commissions) for these short Alibaba Put options was:
Investment (100% Cash-Secured Basis): $37,000.00
= $92.50*400 shares

Net Profit:
(a) Options Income: +$974.25
= 400*$2.46 - $9.75 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation = +$0.00 (short Put options expired)

Total Net Profit: +$974.25
= (+$974.25 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.6%
= +$974.25/$37,000.00
Annualized Return: +26.7%
= (+$974.25/$37,000.00)*(365/36 days)

2. Capital One Financial -- Covered Calls Position Closed at Expiration
The transactions were as follows:
02/06/2017  Bought 300 Capital One Financial shares @ $87.78
02/06/2017 Sold 3 COF Feb2017 $85.50 Call options @ $2.63
Note: this was a simultaneous buy/write transaction.
02/09/2017 Ex-dividend of $120.00 ($.40 per share x 300 shares)
02/17/2017 3 COF Call options were in-the-money at the Feb2017 options expiration, so 300 shares of COF were sold at the $85.50 strike price
Note: the closing price of COF was $91.81 upon the options expiration

The overall performance result (including commissions) was as follows:
Bought 300 shares COF: $26,340.95
= $87.78*300 + $6.95 commission

Net Profit:
(a) Options Income: +$786.90
= ($2.63*300 shares) - $2.10 commissions
(b) Dividend Income: +$120.00
= $.40 per share * 300 shares
(c) Capital Appreciation (COF was above $85.50 strike price at Feb2017 expiration): -$690.95
= ($85.50-$87.78)*300 shares - $6.95 commissions

Total Net Profit (COF was above $85.50 strike price at Feb2017 options expiration): +$215.95
= (+$786.90 options income +$120.00 dividends -$690.95 capital appreciation)

Absolute Return: +0.8%
= +$215.95/$26,340.95
Annualized Return: +24.9%
= (+$215.95/$26,340.95)*(365/12 days)


II. For the one continuing position:
The position that ended at Feb2017 options expiration with the price of the stock below the strike price was Las Vegas Sands Corp (500 shares of  LVS stock).

This position in Las Vegas Sands is included in the listing of the current Covered Calls Advisor Portfolio shown in the right sidebar on this page. For this position, the long shares will remain in the Portfolio until they are either sold or new Covered Calls are established by selling associated Mar2017 options against the stock currently held.   In either case, transactions and overall position results will be posted on this site on the same day they occur.

Thursday, February 16, 2017

Established New Position in Hawaiian Holdings Inc.

Today, a new position was established in Hawaiian Holdings Inc.(ticker HA) by selling ten March 2017 100% cash-secured Put options at the $50 strike price.  The short Puts were chosen instead of the comparable covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, there is potential for a +2.9% absolute return in 30 days (equivalent to a +34.8% annualized return-on-investment).

Hawaiian Holdings Inc. (HA) -- New 100% Cash-Secured Puts Position
This position was established when the price of Hawaiian Holdings was $50.65 (1.3% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 29.3 when this position was established; so the $1.45 price received per share received when the Puts were sold is a nice premium to receive for these 1.3% out-of-the-money Put options.    

The transaction was as follows:
02/16/2017  Sold 5 HA Mar2017 $50.00 100% cash-secured Put options @ $1.45
Note: the price of HA was $50.65 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the five Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $24,993.05
= $50.00*500 - $6.95 commission
Note: the price of HA was $50.65 when these options were sold

Net Profit:
(a) Options Income: +$714.55
= ($1.45*500 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HA is above $50.00 strike price at Mar2017 expiration): +$0.00
= ($50.00-$50.00)*500 shares

Total Net Profit (If Hawaiian Holdings stock price is above $50.00 strike price at Mar2017 options expiration): +$714.55
= (+$714.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HA is above $50.00 strike price at Mar2017 options expiration): +2.9%
= +$714.55/$24,993.05
Annualized Return: +34.8%
= (+$714.55/$24,993.05)*(365/30 days)

The downside 'breakeven price' at expiration is at $48.55 ($50.00 - $1.45), which is 4.1% below the current market price of $50.65.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 17th, 2017 options expiration) for this Hawaiian Holdings short Puts position is 58.2%. This compares with a probability of profit of 50.3% for a buy-and-hold of HA shares over the same time period. Using this probability of profit of 58.2%, the expected value annualized return-on-investment (if held until expiration) is +20.3% (+34.8% * 58.2%), an attractive risk/reward profile for this investment.  

The 'crossover price' at expiration is $52.10 ($50.65 + $1.45).  This is the price above which it would have been more profitable to simply buy-and-hold HA stock until the Mar2017 options expiration date rather than selling these Put options.

Established a 100% Cash-Secured Puts Position in Noble Energy, Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in Noble Energy, Inc.(Ticker Symbol NBL) with a Mar2017 expiration.  As detailed below, this investment will provide a +2.9% absolute return in 30 days (which is equivalent to a +35.2% annualized return) if Noble Energy stock closes at or above $37.50 at options expiration on Mar 17th.  Ten slightly in-the-money Put options were sold with the strike price of $37.50 near the stock price of $37.45 when these options were sold.
Note: This potential result exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  

Details of this transaction along with a potential return-on-investment result are: 

Noble Energy, Inc. (NBL)
The transaction is as follows:
02/16/2017 Sold 10 Mar2017 $37.50 Puts @ $1.10
Note: The price of Noble Energy was $37.45 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the ten Put options sold.

A possible overall performance result (including commissions) for this Noble Energy transaction would be as follows:
100% Cash-Secured Cost Basis: $37,506.95 = $37.50*1,000 + $6.95 commission

Net Profit:
(a) Options Income: +$1,086.05
= ($1.10*1,000 shares) - $13.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NBL closes above $37.50 at Mar2017 expiration): +$0.00
= ($37.50-$37.50)*1,000 shares

Total Net Profit (If NBL is above $37.50 strike price at Mar2017 options expiration):+$1,086.05 
= (+$1,086.05 +$0.00 +$0.00)

Absolute Return: +2.9%
= +$1,086.05/$37,506.95
Annualized Return: +35.2%
= (+$1,086.05/$37,506.95)*(365/30 days)

The downside 'breakeven price' at expiration is at $36.40 ($37.50 - $1.10), which is 2.8% below the current market price of $37.45.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 17th, 2017 options expiration) for this Noble Energy short Puts position is 50.7%. This compares with a probability of profit of 50.3% for a buy-and-hold of Noble Energy stock over the same time period. Using this probability of profit of 50.7%, the Expected Value annualized ROI of this investment (if held until expiration) is +17.8% (+35.2% * 50.7%).
 
The 'crossover price' at expiration is $38.55 ($37.45 + $1.10).  This is the price above which it would have been more profitable to simply buy-and-hold Noble Energy stock until Mar 17th (the Mar2017 options expiration date) rather than holding these short Put options.

Tuesday, February 14, 2017

Established New Position in Dick's Sporting Goods Inc.

Today, the Covered Calls Advisor established a new position in Dick's Sporting Goods Inc. (ticker symbol DKS) by selling five Mar2017 Put options at the $48.00 strike price. This position is a conservative one since it was established when the price of DKS was $50.91 (5.7% downside protection to the strike price) and 32 days remaining until the options expiration date.

As detailed below, the Dick's Sporting Goods Inc. investment will yield a +3.3% absolute return in 32 days (which is equivalent to a +37.5% annualized return-on-investment) if Dick's stock closes above the $48.00 strike price on the Mar 17th options expiration date. 

The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the five Put options sold.

The implied volatility of the Put options was 45 when this position was established; so the $1.60 price per share received when the Puts were sold is a nice premium to receive for these 5.7% out-of-the-money Put options.     

1. Dick's Sporting Goods Inc. (DKS) --
The transaction was as follows:
02/14/2017  Sold 5 DKS 100% cash-secured $48.00 Put options with Mar2017 expirations @ $1.60
Note: the price of Dick's stock was $50.91 today when this transaction was executed.

A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $24,006.95
= $48.00*500 shares + $6.95 commission

Net Profit:
(a) Options Income: +$789.55
= ($1.60 * 500 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DKS closes above $48.00 strike price at Mar2017 expiration): +$0.00
= ($48.00 -$48.00)*500 shares

Total Net Profit: +$789.55
= (+$789.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +3.3%
= +$789.55/$24,006.95
Annualized Return: +37.5%
= (+$789.55/$24,006.95)*(365/32 days)

The downside 'breakeven price' at expiration is at $46.40 ($48.00 - $1.60), which is 8.9% below the current market price of $50.91.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the March 17th, 2017 options expiration) for this Dick's Sporting Goods short Puts position is 70%. This compares with a probability of profit of 50.3% for a buy-and-hold of Dick's stock over the same time period. Using this probability of profit of 70%, the expected value annualized return-on-investment (if held until expiration) is +26.3% (+37.5% maximum potential annualized return on investment * 70%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $52.51 ($50.91 + $1.60).  This is the price above which it would have been more profitable to simply buy-and-hold Dick's Sporting Goods Inc. stock until the Feb2017 options expiration date rather than selling these Put options.

Thursday, February 9, 2017

Information on Early Exercise for Dividend Capture

I have received several questions recently about early exercise of in-the-money covered calls.  It seems that some covered calls investors are overly concerned that stocks they want to continue to hold will be called away from them on the day prior to an ex-dividend date if the stock price is even only slightly above the strike price.

There is little likelihood of a stock being called away by Call options owners unless the option is at least moderately or more likely deep in-the-money (i.e. the stock is moderately or substantially higher than the strike price the day prior to ex-div).  Let's consider my current position in Capital One Financial: Prior Post for COF Position as an example below.

Today was the ex-dividend date with a $.40 dividend per share of Capital One stock.  At the market close yesterday, the price of COF was $87.54 and the strike price is $85.50.
What happened?  NOTHING.  
The Call owner could have exercised his options and purchased the stock at $85.50 (well below current market price) and also captured today's $.40/share dividend.  So why didn't he/she exercise their option?

Instead of viewing it from our perspective (i.e. the Covered Calls owner's perspective), let's view it from the Call owners' perspective.  The closing bid/ask price for these Call options was $2.07/$2.18.  Using a midpoint price of $2.13, we calculate a time value remaining for the only 8 days until these Feb2017 options expire as $.09 = [$2.13 - ($87.54 - $85.50)].  If the price of COF were to open today unchanged from its $87.54 closing price yesterday, if would actually open at $87.14 instead since the ex-div amount is subtracted upon the market open on the ex-div date.  So again, from the Call owners perspective, by not exercising they lose the opportunity to receive the $.40 dividend, however that is exactly offset if they had exercised by the $.40 loss in the market opening stock value for the stock they would have purchased.   So in this Capital One example, the immediate effect of a Call owner exercising their option would have been a net loss of $.09/share time value.  Granted $.09/share for 300 shares would have been only a loss to the Calls owner of $27.00 plus commission, but an immediate loss nevertheless that they avoided by not exercising in order to capture the dividend.

Because the $.09 is a small loss to take, some Call owners might have decided to exercise their options anyway in this case.  As a covered calls investor, I can understand you not necessarily wanting to have your stock called away.  However, I trade covered calls only in IRA accounts where my gains are protected from current year taxes.  So in this case, since there is no short-term capital gains possibility, I welcome getting my shares called away early (the day prior to the ex-div date).  This is because when I compare the annualized return-on-investment for early exercise against an alternative possibility of being in-the-money and my shares called away on the options expiration date, it is much more common that the early exercise provides a higher annualized return. Moreover, the idiom "a bird in the hand is worth two in the bush" also applies here since there is certainly some unwelcome possibility that the stock price will decline to below the strike price in the days until the options expiration date. 

It is certainly not easy to fully understand the early exercise concept described above.  Hopefully, you are now able to better understand the logic.  If not, try re-reading it until you are comfortable in your understanding since it is an important concept for any covered calls position established where there is an ex-div date prior to the options expiration date.

As always, I welcome the opportunity to address anything on this topic further.  Just email me at partlow@cox.net.

Best regards and Godspeed,
Jeff

Monday, February 6, 2017

Established Covered Calls Position in Capital One Financial Corp.

Today, a covered calls position was established in Capital One Financial Corp. (ticker symbol COF) with a Feb2017 expiration.  This covered calls position includes consideration of the upcoming $.40 quarterly dividend on February 9th. Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established with the strike price of $85.50 (below the stock purchase price of $87.78).

As detailed below, a potential return is +0.8% absolute return in 12 days (equivalent to a +24.9% annualized return-on-investment)

Note: This potential result is above the Covered Calls Advisor's desired threshold of 20% annualized return-on-investment.  

The detailed transactions and potential return-on-investment result is as follows:

1.  Capital One Financial Corp. (COF) -- New Covered Calls Position
The transactions were as follows:
02/06/2017  Bought 300 Capital One Financial shares @ $87.78
02/06/2017 Sold 3 COF Feb2017 $85.50 Call options @ $2.63
Note: this was a simultaneous buy/write transaction.
02/09/2017 Ex-dividend of $120.00 ($.40 x 300 shares)

A possible overall performance result (including commissions) would be as follows:
Bought 300 shares COF: $26,340.95
= $87.78*300 + $6.95 commission

Net Profit:
(a) Options Income: +$786.75
= ($2.63*300 shares) - $2.25 commissions
(b) Dividend Income: +$120.00
= $.40 * 300 shares
(c) Capital Appreciation (If COF is above $85.50 strike price at Feb2017 expiration): -$690.95
= ($85.50-$87.78)*300 shares - $6.95 commissions

Total Net Profit (If COF is above $85.50 strike price at Feb2017 options expiration): +$215.80
= (+$786.75 options income +$120.00 dividends -$690.95 capital appreciation)

Absolute Return (If COF is above $85.50 strike price at Feb2017 options expiration): +0.8%
= +$215.80/$26,340.95
Annualized Return: +24.9%
= (+$215.80/$26,340.95)*(365/12 days)

The downside 'breakeven price' at expiration is at $84.75 ($87.78 - $.40 -$2.63), which is 3.5% below the current market price of $87.78.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Feb 17th, 2017 options expiration) for this Capital One covered calls position is 78.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Capital One stock over the same time period. Using this probability of profit of 78.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +19.6% (+24.9% * 78.5%).

The 'crossover price' at expiration is $90.01 ($87.78 + $2.63 - $.40).  This is the price above which it would have been more profitable to simply buy-and-hold Capital One stock until Feb 17th (the Feb2017 options expiration date) rather than establishing this covered calls position.