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Thursday, February 1, 2018

Covered Calls Established in Valero Energy Corp.

Today, a Covered Calls positions was established in Valero Energy Corp. (ticker VLO) for the February 16th, 2018 expiration and at the $92.50 strike price when the stock was at $93.53.   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 27.8 when this position was established and the open interest was 1,300 contracts.  There is an upcoming ex-dividend of $.80 on February 12th which is included in the analysis below.

As detailed below, a potential outcome for this investment is +2.4% absolute return-on-investment for the next 16 days (equivalent to +54.7% on an annualized return basis) if Valero Energy stock closes above the $92.50 strike price on the February 16th options expiration date.

Valero Energy Corp. (VLO) -- New Covered Calls Position
The transactions were:
02/01/2018 Bought 200 shares of Valero Energy stock @ $93.53 per share 
02/01/2018 Sold 2 Valero Energy Feb 16th, 2018 $92.50 Call options @ $2.44 per share
02/12/2018 Upcoming ex-dividend of $.80 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,224.29
= ($93.53 - $2.44)* 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$488.00
= ($2.44* 200 shares)
(b) Dividend Income: +$160.00
= $.80 per share * 200 shares 
(c) Capital Appreciation (If Valero stock is above $92.50 strike price at Feb 16th expiration): -$210.95
= ($92.50 -$93.53)* 200 shares - $4.95 commission

Potential Total Net Profit (If VLO stock assigned at expiration): +$437.05
= (+$488.00 options income +$160.00 dividend income -$210.95 capital appreciation)

Absolute Return: +2.4%
= +$437.05/$18,224.29
Equivalent Annualized Return: +54.7%
= (+$437.05/$18,224.29)*(365/16 days)

The downside 'breakeven price' at expiration is at $90.29 ($93.53 - $2.44 - $.80), which is 3.5% below the current market price of $93.53.  This is good downside protection given the very attractive +54.7% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Feb 18th, 2018 options expiration) for this Valero Covered Calls position is 58.9%, so the expected value annualized ROI of this investment (if held until expiration) is +32.2% (+54.7% * 58.9%), a very nice expected value result for this conservative in-the-money Covered Calls position.  

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