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