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.
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
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%
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%
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.