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Thursday, February 1, 2018

Covered Calls Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel Corp. (ticker X) for the March 16th, 2018 expiration and at the $36.00 strike price when the stock was at $36.72.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, an in-the-money position was established.

The Implied Volatility of these options was 43.7 when this position was established and the open interest was 458 contracts.  There is a likely upcoming ex-dividend of $.05 on February 8th which is included in the analysis below and there is no quarterly earnings report prior to expiration..


As detailed below, a potential outcome for this investment is a +5.7% absolute return-on-investment for the next 44 days (equivalent to +47.1% on an annualized return basis) if U.S. Steel stock closes above the $36.00 strike price on the options expiration date.



United States Steel Corp. (X) -- New Covered Calls Position
The transactions were:
02/01/2018 Bought 400 shares of U.S. Steel stock @ $36.72 per share 
02/01/2018 Sold 4 U.S. Steel Mar 16th, 2018 $36.00 Call options @ $2.62 per share
Note: this was a simultaneous Buy/Write transaction
02/08/2018 Upcoming ex-dividend of $.05 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $13,647.63
= ($36.72 - $2.62)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$1,048.00
= ($2.62* 400 shares)
(b) Dividend Income: +$20.00
= $.05 per share * 400 shares 
(c) Capital Appreciation (If X is above $36.00 strike price at Mar 16th expiration): -$292.95
= ($36.00 -$36.72)* 400 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$775.05
= (+$1,048.00 options income +$20.00 dividend income -$292.95 capital appreciation)

Absolute Return: +5.7%
= +$775.05/$13,647.63
Equivalent Annualized Return: +47.1%
= (+$775.05/$13,647.63)*(365/44 days)

The downside 'breakeven price' at expiration is at $34.05 ($36.72 - $2.62 - $.05), which is 7.3% below the current market price of $36.72.  This is good downside protection given the very attractive +47.1% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2018 options expiration) for this U.S. Steel Covered Calls position is 59.8%, so the expected value annualized ROI of this investment (if held until expiration) is +28.2% (+47.1% * 59.8%), a nice expected value result for this slightly in-the-money Covered Calls position.  

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