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Tuesday, January 2, 2018

Covered Calls Established in Bristol-Myers Squibb Co.

Today, a Covered Calls positions was established in Bristol-Myers Squibb Co. (ticker BMY) for the January 19th, 2018 expiration and at the $59.00 strike price when the stock was at $60.94.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.

The Implied Volatility of these options was 28.3 when this position was established and the open interest was 133 contracts.  There is an upcoming ex-dividend of $.40 this Thursday (January 4th) which is included in the analysis below.


As detailed below, a potential outcome for this investment is +1.3% absolute return-on-investment for the next 18 days (equivalent to +26.6% on an annualized return basis) if Bristol-Myers stock closes above the $59.00 strike price on the January 19th options expiration date.


Bristol-Myers Squibb Co. (BMY) -- New Covered Calls Position
The transactions were:
01/02/2018 Bought 500 shares of Bristol-Myers stock @ $60.94 per share 
01/02/2018 Sold 5 Bristol-Myers Jan 19th, 2018 $59.00 Call options @ $2.32 per share
Note: this was a simultaneous Buy/Write transaction
01/04/2018 Upcoming ex-dividend of $.40 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $29,318.30
= ($60.94 - $2.32)* 500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$1,160.00
= ($2.32* 500 shares)
(b) Dividend Income: +$200.00
= $.40 per share * 500 shares 
(c) Capital Appreciation (If BMY is above $59.00 strike price at Jan 19th expiration): -$974.95
= ($59.00 -$60.94)* 500 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$385.05
= (+$1,160.00 options income +$200.00 dividend income -$974.95 capital appreciation)

Absolute Return: +1.3%
= +$385.05/$29,318.30
Equivalent Annualized Return: +26.6%
= (+$385.05/$29,318.30)*(365/18 days)

The downside 'breakeven price' at expiration is at $58.22 ($60.94 - $2.32 - $.40), which is 4.5% below the current market price of $60.94.  This is good downside protection given the nice +26.6% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the January 19th, 2018 options expiration) for this Bristol-Myers Covered Calls position is 70.3%, so the expected value annualized ROI of this investment (if held until expiration) is +18.7% (+26.6% * 70.3%), a nice expected value result for this moderately in-the-money Covered Calls position.  

6 comments:

  1. If BMY goes ex-dividend on Jan 4, and you bought the stock today, the trade won't settle until Jan 4. Would you not need to hold the stock by COB on Jan 3 to get the dividend? How does that work? thank you.

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    1. For any stock, whoever owns the shares at the close of business on the business day prior to the ex-dividend date will receive the dividend. The shares are owned on the date they are purchased, so BMY stock could even be bought tomorrow and the purchaser will receive the dividend. But remember, the stock value declines by the amount of the dividend upon the market open on the ex-dividend date, so there is no opportunity to arbitrage the dividend ("no such thing as a free lunch").

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  2. Thank you for the explanation. I thought the trade had to settle first. Good to know. I look forward to a future blog on how you screen for the stocks on which your write calls. Cheers.

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  3. Yep, the ex-Div date is usually set a couple of days before the record date and is the date when the stock reduces in value by the amount of the dividend. Then there is the payout date which is when those shareholders that held the stock into/through the ex-dividend date are paid out.

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  4. Hi Jeff,

    Love your website and the content you provide for the covered call community. One of the best financial content websites I have ever seen. Thanks for all the trades.

    I have a question:

    When do you buy protective put?

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    Replies
    1. Sankar,

      Thank you for your kind words.

      I never buy protective Puts. On average they decrease the return-on-investment of Covered Call positions and this recent academic study affirms it:
      https://tinyurl.com/y945wft9


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