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Wednesday, March 7, 2018

Covered Calls Established in Sinclair Broadcast Group Inc.

Today, a Covered Calls position was established in Sinclair Broadcast Group, Inc. (ticker SBGI) for the March 16th expiration and at the $33.00 strike price.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a slightly in-the-money position was established.

The Implied Volatility of these Call options was 38.3 when this position was established.  This is noticeably higher than the average Historic Volatility for Sinclair so far this year, so selling these Call options premiums at this time seems very advantageous, especially since there is no quarterly earnings report in the next 10 days prior to expiration.  In addition, there is an upcoming ex-dividend of $.18 tomorrow which is included in the analysis below.

Sinclair is 'Buy'-rated by Reuters -- the highest of their five rating categories.  To put that in context, of the Analysts' consensus ratings reported by Reuters (8 Analysts currently follow SBGI), only 6.5% of 3,608 optionable stocks are now 'Buy'-rated.  I also like investing now in companies that will benefit substantially this year from the corporate tax rate reduction and Sinclair certainly qualifies since their 2017 tax rate was 31.3%. 

As detailed below, a potential outcome for this investment is a +2.4% absolute return-on-investment for the next 10 days (equivalent to +86.4% on an annualized return basis) if the stock closes above the $33.00 strike price on the March 16th options expiration date.

Sinclair Broadcast Group Inc. (SBGI) -- New Covered Calls Position
The transactions were as follows:
03/07/2018 Bought 400 shares of Sinclair stock @ $33.40 per share 
03/07/2018 Sold 4 Sinclair March 16th, 2018 $33.00 Call options @ $1.00 per share
Note: this was a simultaneous Buy/Write transaction
03/08/2018 Upcoming ex-dividend of $.18 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $12,967.63
= ($33.40 - $1.00)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$400.00
= ($1.00* 400 shares)
(b) Dividend Income: +$72.00
= $.18 per share * 400 shares 
(c) Capital Appreciation (If SBGI is above $33.00 strike price at Mar 16th expiration): -$164.95
= ($33.00 -$33.40)* 400 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$307.05
= (+$400.00 options income +$72.00 dividend income -$164.95 capital appreciation)

Absolute Return: +2.4%
= +$307.05/$12,967.63
Equivalent Annualized Return: +86.4%
= (+$307.05/$12,967.63)*(365/10 days)

The downside 'breakeven price' at expiration is at $32.22 ($33.40 - $1.00 - $.18), which is 3.5% below the current market price of $33.40.  This is substantial protection given the very high 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 Sinclair Covered Calls position is 57.3%, so the expected value annualized ROI of this investment (if held until expiration) is +50.2% (+87.6% * 57.3%), a nice expected value result for this in-the-money Covered Calls position.   

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