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Thursday, June 21, 2018

Established Covered Calls Position in JPMorgan Chase & Co.

Today, a Covered Calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) with a July 20th, 2018 expiration and at the $105.00 strike price.  This position uses the Covered Calls Advisor's Dividend Capture Strategy since there is an upcoming ex-dividend of $.56 on July 5th which is prior to the options expiration date.  So, the potential returns-on-investment shown below includes the possibility of early assignment on the last business day prior to the ex-dividend date.  The next quarterly earnings report is scheduled for July 13th, so it will be possible to capture the dividend and then decide whether to liquidate the shares prior to the earnings report or to hold the position through earnings.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, a slightly in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +1.4% absolute return (equivalent to +36.6% annualized return for the next 14 days) if the stock is assigned early (business day prior to the July 5th ex-date); OR +1.9% absolute return (equivalent to +23.7% annualized return over the next 30 days) if the stock is assigned on the July 20th options expiration date.

JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
Although unlikely, if the current time value (i.e. extrinsic value) of $1.47 [$3.70 option premium - ($107.23 stock price - $105.00 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by July 3rd (the final business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 500 JPM shares away to capture the dividend payment.

The transactions were:
06/21/2018 Bought 500 JPM shares @ $107.23
06/21/2018 Sold 5 JPM 7/20/2018 $105.00 Call options @ $3.70
Note: a simultaneous buy/write transaction was executed.
07/05/2018 Upcoming quarterly ex-dividend of $.56 per share

Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost: $51,769.95
= ($107.23 - $3.70) *500 shares + $4.95 commission

Net Profit:
(a) Options Income: +$1,846.65
= ($3.70*500 shares) - $3.35 commissions
(b) Dividend Income (If option exercised early on July 3rd, the business day prior to July 5th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Jul 20th, 2018 expiration): +$280.00
= ($.56 dividend per share x 500 shares)
(c) Capital Appreciation (If JPM assigned early): -$1,119.95
+($105.00 -$107.23)*500 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $110.00 strike price at expiration): -$1,119.95
+($105.00-$107.23)*500 - $4.95 commissions

1. Total Net Profit [If option exercised on July 3rd (business day prior to July 5th ex-dividend date)]: +$726.70
= (+$1,846.65 +$0.00 -$1,119.95); or
2. Total Net Profit (If JPM assigned at $105.00 at July 20th, 2018 expiration): +$1,006.70
= (+$1,846.65 +$280.00 -$1,119.95)

1. Absolute Return (If option exercised on July 3rd which is th business day prior to the ex-dividend date): +1.4%
= +$726.70/$51,769.95
Annualized Return (If option exercised early): +36.6%
= (+$726.70/$51,769.95)*(365/14 days); or
2. Absolute Return (If JPM assigned at $105.00 at July 20, 2018 expiration): +1.9%
= +$1,006.70/$51,769.95
Annualized Return (If JPM assigned at $105.00 at July 20, 2018 expiration): +23.7%
= (+$1,006.70/$51,769.95)*(365/30 days)

Either outcome provides a nice return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $105.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $102.97 ($107.23 -$3.70 -$.56) provides 4.0% downside protection below today's purchase price.

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, ten of the eleven criteria are achieved for this JPMorgan position.

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