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Tuesday, January 23, 2018

Established Covered Calls in Delta Air Lines Inc.

Today, a Covered Calls position was established in Delta Air Lines (DAL) for the March 16th, 2018 options expiration date.  Given the Covered Calls Advisor's current neutral overall market outlook, a moderately in-the-money position was established. Also, although the next quarterly ex-dividend has not yet been declared, it is likely that a $.305 ex-dividend will be announced very soon with an ex-dividend date of February 21st likely, and this expectation is included in the calculations below.

Two potential return-on-investment results are (1) a +2.38% absolute return in 28 days (equivalent to a +30.0% annualized return-on-investment) if assigned early on the day prior to the ex-dividend date; or (2) a +2.92% absolute return in 53 days (equivalent to a +20.1% annualized return-on-investment) if assigned at expiration.
Details for the Delta Air Lines position are provided below to explain the position further for those readers interested in understanding the type of thought processes and calculations underlying establishing this Covered Calls position.
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
First and foremost, is is essential to invest only in companies that you are bullish about.  Delta meets the Covered Calls Advisor's key quality, value, and growth metrics.  My bullish sentiment is shared by many respected analysts including their highest rating category by Argus, CFRA, and the Average Analysts' Ratings as reported by Reuters.  Delta is one of only 4 companies that have already reported quarterly earnings within the past month and is currently also rated 'Buy' by Reuters.  Of the 18 analysts following Delta and tracked by Reuters, all 18 currently have either a Buy or Outperform rating on Delta.   Also, as shown below, the potential rate-of-return meets the Covered Calls Advisor's desired threshold of +20% annualized return if assigned at expiration.  Also positive is Delta's industry-high annual dividend yield of 2.1%.

Because of Put/Call parity, Covered Calls and Cash-Secured Puts are synthetically equivalent strategies (when done at the same strike price for the same expiration date).  However, subtle and temporary differences often exist, so just prior to executing the transactions, a comparison is made to see which strategy provides a better potential return.  For Delta, the chart below shows that the potential annualized return of +20.1% at expiration for the Covered Calls position is preferable to the +17.6% for a comparable 100% Cash-Secured Puts position in this instance:

Notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position".  The "NO" in this case means that Delta does not have a quarterly earnings report prior to the options expiration.

Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that Delta will go ex-dividend sometime between today and the March 16th, 2018 options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to assess whether the pre-determined criteria are met to justify establishing a covered calls position for Delta.  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, all eleven criteria are achieved for this Delta Air Lines Inc. position.

The detailed transactions and calculations are as follows:
01/23/2018  Bought 400 Delta Air Lines Inc. shares @ $59.63
01/23/2018 Sold 4 DAL Mar 16, 2018 $57.50 Call options @ $3.48
The Call options Open Interest was 7,772 contracts when this position was established and their Implied Volatility was 25.5
Note: this was a simultaneous buy/write transaction.
02/21/2018 Expected $.305 ex-dividend

Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 400 shares DAL: $22,067.63
= ($58.63 -$3.48)*400 shares + $7.63 commissions

Net Profit Components:
(a) Options Income: +$1,392.00
= ($3.48*400 shares)
(b) Dividend Income (If Delta shares assigned early on day prior to ex-div date): +0.00; OR
(b) Dividend Income (If Delta shares assigned on Mar 16th options expiration date): $122.00
= $.305 per share x 400 shares
(c) Capital Appreciation (If DAL Calls exercised early or if exercised at Mar 16th options expiration date): -$856.95
= ($57.50-$59.63)*400 shares - $4.95 commissions

Total Net Profit:
(a) If DAL Calls exercised early on day prior to ex-div date: +$535.05
= (+$1,392.00 options income +$0.00 dividends -$856.95 capital appreciation); OR
(b) If Delta shares assigned on Mar 16th options expiration date: +$657.05
= (+$1,392.00 options income +$122.00 dividends -$856.95 capital appreciation)

Potential Return-on-Investment Results:
(a) If Delta shares assigned early on day prior to ex-div date:
Absolute Return: +2.4%
= +$535.05/$22,067.63
Annualized Return: +30.0%
= (+$535.05/$22,067.63)*(365/28 days); OR

(b) If Delta shares assigned on Mar 16th options expiration date:
Absolute Return: +2.92%
= +$657.05/$22,067.63
Annualized Return: +20.1%
= (+$657.05/$22,067.63)*(365/53 days)

The downside 'breakeven price' at expiration is at $54.845 ($58.63 - $3.48 -$.305), which is 6.5% below the current market price of $58.63. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Mar 16th, 2018 options expiration) for this Delta Air Lines covered calls position is 65.4%, so the expected value annualized ROI of this investment (if held until expiration) is +13.1% (+20.1% * 65.4%), a satisfactory result for this moderately in-the-money Covered Calls position.


  1. Do you ever buy back the call option when there is a sharp drop in the stock price?

    1. Good question. On rare occasions, but only if the Calls decline below about 20% of their original value. Then I will consider rolling down to a different strike price, but again, only rarely.

    2. I have always found exit strategies to be beneficial and added to my income. I think I tend to invest in more volatile stocks than you do, as I mostly use momentum stocks from IBD lists.

  2. I bought at 56.86 and sold 55.00 calls for 3.43

  3. Welp....Wynn made a move. Sure glad to have not gotten caught in that one. That said, I am wondering if there is an opportunity for Feb expire with IV raised to be able to provide enough downside protection (to sleep at night) and claim the dividend. I will be watching it next week.

  4. Other than Wynn, here are some others I am looking at...all Feb expiration.
    - STLD: $45 or $46 strike
    - CELG: $101 strike
    - FCX: $18 or $18.5 strike
    - WDC: $87 or $86.5 strike