Saturday, February 27, 2021
Continuation of Alibaba Group Holdings Ltd. Position
Friday, February 26, 2021
Roll-Out D.R. Horton Inc. Covered Calls Position
Two potential return-on-investment results for this D.R. Horton Covered Calls position are: (1) +3.1% absolute
return in 47 days (equivalent to a +24.3% annualized
return-on-investment) if the stock price is unchanged at $77.82; and (2) +6.3% absolute
return in 47 days (equivalent to a +48.9% annualized
return-on-investment) if the stock closes above the $80.00 strike price on the March 19th options expiration date.
The detailed transactions and two potential results are provided below.
D.R. Horton Inc. (DHI) -- Roll-Out Covered Calls Position
The initial Buy/Write transaction was as follows:
02/01/2021 Bought 200 shares of D.R. Horton Inc. stock @ $76.28 per share
02/01/2020 Sold 2 D.R. Horton February 26th, 2021 $70.00 Call options @ $7.44 per share
Note: the Implied Volatility of the Calls was 40.8 which (as desired by the Covered Calls Advisor) was above the S&P 500 Volatility Index (VIX) reading of 32.1 when this transaction was executed.
02/10/2021 Roll-Up transaction: Bought-to-Close 2 DHI Feb. 26th, 2021 $70.00 Call options at $13.43 per share and simultaneously Sold-to-Open 2 DHI February 26th, 2021 $80.00 Calls at $4.45 per share. Note: the Implied Volatility of the $80.00 strike price Calls was 33.1 when this debit spread transaction was executed.
02/16/2021 Ex-dividend of $.20 per share
02/26/2021 Roll-Out transaction: Bought-to-Close 2 DHI Feb. 26th, 2021 $80.00 Call options at $.03 per share and simultaneously Sold-to-Open 2 DHI March 19th, 2021 $80.00 Calls at $2.01 per share. Note: the Implied Volatility of the 3/19/2021 $80.00 Calls was 38.2 when this credit spread transaction was executed.
Two overall performance results (including commissions) at expiration would be as follows:
Covered Calls Cost Basis: $13,769.34
= ($76.28 - $7.44) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$82.64
= ($7.44 - $13.43 + $4.45 - $.03 +$2.01) * 200 shares - $5.36 commissions
(b) Dividend Income: +$40.00
= $.20 per share x 200 shares
(c) Capital Appreciation (If D.R. Horton stock is unchanged at $77.82 at the March 19th options expiration): +$308.00
= ($77.82 - $76.28) * 200 shares; or
(c) Capital Appreciation (If D.R. Horton stock is above $80.00 strike price at the March 19th expiration): +$744.00
= ($80.00 - $76.28) * 200 shares
1. Total Net Profit (If D.R. Horton stock is unchanged at $77.82 at the March 19th options expiration): +$430.64
= (+$82.64 options income +$40.00 dividend income +$308.00 capital appreciation); or
2. Total Net Profit (If D.R. Horton stock is above $80.00 strike price at the March 19th expiration): +$866.64
= (+$82.64 options income +$40.00 dividend income +$744.00 capital appreciation)
1. Absolute Return: (If D.R. Horton stock is unchanged at $77.82 at the March 19th options expiration): +3.1%
= +$430.64/$13,769.34
Equivalent Annualized Return: +24.3%
= (+$430.64/$13,769.34)*(365/47 days); or
2. Absolute Return: (If D.R. Horton stock is above $80.00 strike price at the March 19th options expiration): +6.3%
= +$866.64/$13,769.34
Equivalent Annualized Return: +48.9%
= (+$866.64/$13,769.34)*(365/47 days)
Covered Calls Established in Bank of America Corp. Using Dividend Capture Strategy
Most mid-to-large-cap companies in the Financial Sector provide only modest growth prospects, but they often pay 2.0%+ annual dividend yields. Consequently, the Covered Calls Advisor is targeting opportunities to use the Dividend Capture Strategy in all Financial Sector Covered Calls positions established in upcoming months. This new February Bank of America Covered Calls position continues the Dividend Capture Strategy of often selling
in-the-money monthly Covered Calls for one of five very large U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley) for each options expiration
month:
(JPMorgan Chase quarterly for Jan, Apr, July, and Oct options expirations;
Citigroup and/or Morgan Stanley for Feb, May, Aug, and Nov options expirations; and
Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec options expirations).
The goal of these monthly Covered Calls in these banks is to both capture the quarterly dividend payment and for the stock prices to remain above the strike price at
options expiration, thereby achieving the maximum possible return-on-investment result for the position. So far, this approach has provided attractive annualized return results -- much better than would be achieved
by also writing Covered Calls positions on these bank stocks in non-dividend paying months. Hopefully, these outperformance results achieved to-date using this strategy will continue with this
March 12th, 2021 Bank of America Covered Calls position.
Two potential return-on-investment results are: (a) +0.9% absolute return (equivalent to +57.8% annualized
return for the next 6 days) if the stock is assigned early [on the last trading day prior to the ex-dividend date]; OR (b) +1.5%
absolute return (equivalent to +36.1% annualized return over the next 15
days) if the stock is assigned on the March 12th options expiration date.
Bank of America Corp. (BAC) -- New Covered Calls Position
The buy/write transaction was as follows:
02/26/2021 Bought 1,000 shares of Bank of America Corp. stock @ $35.48 per share
02/26/2021 Sold 10 BAC March 12th, 2021 $34.00 Call options @ $1.80 per share
Note: The Open Interest in these Calls was 850 contracts and the Implied Volatility was 30.6
03/04/2021 Ex-dividend of $.18 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $33,686.70
= ($35.48 - $1.80) * 1,000 shares + $6.70 commission
Net Profit Components:
(a) Options Income: +$1,800.00
= ($1.80 * 1,000 shares)
(b) Dividend Income (If BAC shares assigned on 3/3/2021, the business day prior to the 3/4/2021 ex-dividend date): = +$0.00; or
(b) Dividend Income (If shares assigned at 3/12/2021 options expiration): +$180.00
= $.18 per share x 1,000 shares
(c) Capital Appreciation (If BAC shares assigned early on 3/3/2021): -$1,480.00
= ($34.00 -$35.48) * 1,000 shares; or
(c) Capital Appreciation (If shares above $34.00 strike price at March 12th options expiration): -$1,480.00
= ($34.00 -$35.48) * 1,000 shares
1. Potential Net Profit (If Bank of America shares assigned on 3/3/2021, the day prior to the March 4th ex-dividend date): +$320.00
= (+$1,800.00 options income +$0.00 dividend income - $1,480.00 capital appreciation)
2. Potential Net Profit (If BAC price is above $34.00 strike price at March 12th options expiration): +$500.00
= (+$1,800.00 options income +$180.00 dividend income - $1,480.00 capital appreciation)
1. Absolute Return (If BAC shares assigned on 3/3/2021, the day prior to the March 4th ex-dividend date): +0.9%
= +$320.00/$33,686.70
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +57.8%
= (+$320.00/$33,686.70)*(365/6 days)
2. Absolute Return (If BAC price is above $34.00 strike price at March 12th options expiration): +1.5%
= +$500.00/$33,686.70
Equivalent Annualized Return (If assigned on 3/12/2021 options expiration date): +36.1%
= (+$500.00/$33,686.70)*(365/15 days)
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy. As shown below, all nine criteria are achieved for this Bank of America Covered Calls position.
Thursday, February 25, 2021
Early Assignment of Raytheon Technologies Inc. Covered Calls
As detailed below, a very attractive +1.0% absolute return in 8 days (equivalent to a +43.4% annualized return-on-investment) was achieved for this position. The Covered Calls Advisor is pleased with this result since the annualized return of +43.4% that has been achieved was greater than the +35.1% annualized roi that might have been achieved in the future if the stock price remains above the strike price at market close on the March 5th, 2021 options expiration date.
Raytheon Technologies Corporation (RTX) -- Early Assignment of Covered Calls Position
The buy/write transaction was:
02/17/2021 Sold 2 Raytheon 03/05/2021 $70.00 Call options @ $3.06
Note: the Time Value (aka Extrinsic Value) in the Call options was $.66 per share = [$3.06 Call options premium - ($72.40 stock price - $70.00 strike price)] when this transaction executed.
02/24/2021 Early Assignment of 2 Raytheon 3/5/2021 $70.00 Call options, so 200 shares of RTX stock were sold at the $70.00 strike price and the RTX Covered Calls position was thereby closed out.
The overall performance results (including commissions) for this Raytheon Covered Calls position are as follows:
Covered Calls Cost Basis: $13,869.34
= ($72.40 - $3.06) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$612.00
= ($3.06 * 200 shares)
(b) Dividend Income (If option exercised early on Feb. 24th, 2021, the business day prior to the Feb. 25th ex-div date): +$0.00
+($70.00 sale at strike price - $72.40 stock purchase price) * 200 shares
Wednesday, February 24, 2021
Established Covered Call Position in Home Depot Inc. Using Dividend Capture Strategy
This position uses the Covered Calls Advisor's Dividend Capture Strategy since Home Depot has an upcoming quarterly ex-dividend of $1.65 per share on March 10th which is prior to the March 19th options expiration. This is equivalent to an absolute annualized dividend yield of 2.6% (at the $258.75 stock price) and an equivalent annualized dividend yield of 9.7% = [($1.65/$258.75) x (365/24 days to expiration)]. This dividend is included in the detailed return-on-investment calculations below. Either an early assignment on the day prior to the ex-dividend date or on the March 19th expiration date would be desirable to the Covered Calls Advisor given the potential annualized return-on-investment for either outcome.
There were two primary advantages for establishing a Covered Call position instead of a Cash-Secured Put position: (1) Since there is an intervening ex-dividend prior to options expiration, the Covered Call provides a possibility of early assignment at a somewhat higher annualized return-on-investment than if the position were to instead be assigned on the options expiration date; and (2) As shown in the comparison chart below, the potential annualized return-on-investment at expiration of +28.9% for the Covered Call is greater than the potential +25.9% for the comparable Cash-Secured Put position. The Covered Calls Advisor has observed that it is normally advantageous to enter a Covered Calls position (instead of the comparable 100% Cash-Secured Puts position) whenever there is an intervening ex-dividend date prior to the options expiration date.
Also important to the Covered Calls Advisor, Home Depot's quarterly earnings were reported yesterday, so there is no earnings report before the options expiration date. In addition, although the Covered Calls Advisor depends primarily on fundamental
value factors in deciding what stocks to purchase, a minor consideration
is given to technical factors. In that regard, the 2-day Relative
Strength Index [i.e. RSI(2)] for Home Depot moved deep into short-term oversold
territory this morning at a very low reading of 2.1 when this position was established. (Note: below 30 is normally considered as
oversold and above 70 is considered overbought).
As shown on the table at the bottom of this post, all nine criteria of
the Dividend Capture Strategy are met
with this position. The Covered Calls Advisor's current Overall Market Meter outlook remains cautious, so the appropriate Covered Calls strategy is to sell in-the-money strike prices. The Delta for these Call options was 69.7 when this position was established which approximates the probability that the position will be in-the-money at market close on the options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.2% absolute return (equivalent to +32.1% annualized
return for the next 14 days) if the stock is assigned early (business day
prior to the March 10th ex-dividend date).
- +1.9% absolute return (equivalent to +28.9% annualized return over the next 24 days) if the stock is assigned on the March 19th, 2021 options expiration date.
Home Depot Inc. (HD) -- New Covered Call Position
The buy/write transaction was:
02/24/2021 Bought 100 Home Depot shares @ $258.75
02/24/2021 Sold 1 Home Depot 03/19/2021 $250.00 Call option @ $11.79
Note: Implied Volatility (IV) of the Call options was at 24.7 when this position was established.
03/10/2021 Upcoming quarterly ex-dividend of $1.65 per share
Two possible overall performance results (including commissions) for this Home Depot Covered Call position are as follows:
Covered Calls Cost Basis: $24,696.67
= ($258.75 - $11.79) * 100 shares + $.67 commission
Net Profit Components:
(a) Options Income: +$1,179.00
= ($11.79 * 100 shares)
(b) Dividend Income (If option exercised early on March 9th, 2021, the business day prior to the March 10th ex-div date): +$0.00; or
(b) Dividend Income (If Home Depot stock assigned at March 19th, 2021 options expiration): +$165.00
= ($1.65 dividend per share x 100 shares)
+($250.00 - $258.75) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $250.00 strike price at options expiration): -$875.00
+($250.00 - $258.75) * 100 shares
Either outcome provides an attractive return-on-investment result for this Home Depot investment. These returns will be achieved as long as the stock is above the $250.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $245.32 ($258.75 -$11.79 -$1.65) provides 5.2% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy. As shown below, all nine criteria are achieved for this Home Depot Inc. Covered Call position.
Roll-Up-and-Out Micron Technology Inc. Covered Calls
This remains a conservative in-the-money Covered Calls position since the Delta for these new Calls when this rollout transaction was executed was 68.1 which closely approximates the probability of assignment at options expiration (i.e. 68.1% probability). Also as preferred by the Covered Calls Advisor, there is no quarterly earnings report for Micron prior to the new March 19thth, 2021 options expiration date since the next Micron earnings report is on March 31st, 2021.
As detailed below, a potential return-on-investment result for this Micron Technology Inc. position is +7.8% absolute
return in 52 days (equivalent to a +54.5% annualized
return-on-investment) if the stock closes above the $85.00 strike price at the March 19th options expiration.
Micron Technology Inc. (MU) -- Roll-Up-and-Out Covered Calls Position
The Buy/Write transaction was as follows:01/27/2021 Bought 200 shares of Micron Technology Inc. stock @ $76.0865 per share
01/27/2021 Sold 2 Micron Feb. 19th, 2021 $72.50 Call options @ $5.63 per share
02/11/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 MU Feb. 19th, 2021 $72.50 Call options at $12.85 per share and simultaneously Sold-to-Open 2 MU Feb. 26th, 2021 $80.00 Calls at $6.30 per share. This roll-up-and-out transaction occurred at a net debit of $6.55 ($12.85 - $6.30) per share. The price of Micron's stock was $85.24 when this net debit limit order was executed.
02/24/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 MU Feb. 26th, 2021 $80.00 Call options at $9.70 per share and simultaneously Sold-to-Open 2 MU March 19th, 2021 $85.00 Calls at $7.20 per share. This roll-up-and-out transaction occurred at a net debit of $2.50 ($9.70 - $7.20) per share. The price of Micron's stock was $89.50 when this net debit limit order was executed.
A possible overall performance result (including commissions) if the stock price is above the $85.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $14,092.64
= ($76.0865 - $5.63) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: -$688.02
= ($5.63 - $12.85 + $6.30 -$9.70 +$7.20) * 200 shares - $4.02 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron stock is above $85.00 strike price at the March 19th, 2021 options expiration): +$!,782.70
= ($85.00 - $76.0865) * 200 shares
Total Net Profit: +$1,094.68
= (-$688.02 options income +$0.00 dividend income + $1,782.70 capital appreciation)
Absolute Return: +7.8%
= +$1,094.68/$14,092.64
Equivalent Annualized Return: +54.5%
= (+$1,094.68/$14,092.64)*(365/52 days)
Tuesday, February 23, 2021
Covered Calls Established in Alibaba Group Holdings Ltd. and Applied Materials Inc.
As detailed below, potential return-on-investment results for each of these Covered Calls positions are:
- For Alibaba Group Holdings Ltd.: +1.3% absolute return (equivalent to +41.7% annualized return over the next 11 days) if the stock is assigned on the March 5th options expiration date.
- For Applied Materials Inc.: +1.7% absolute return (equivalent to +57.7% annualized return over the next 11 days) if the stock is assigned on the March 5th options expiration date.
1. Alibaba Group Holdings Ltd. (BABA) -- New Covered Call Position
The transactions were as follows:
2/23/2021 Bought 100 shares of Alibaba stock @ $244.92 per share
2/23/2021 Sold 1 Alibaba March 5th, 2021 $235.00 Call option @ $12.84 per share
Note: this was a simultaneous Buy/Write transaction. The Implied Volatility of the Call options was 39.0 when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $23,208.67
= ($244.92 - $12.84) * 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: +$1,284.00
= ($12.84 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA stock is above $235.00 strike price at March 5th, 2021 expiration): -$992.00
= ($235.00 -$244.92) * 100 shares
Total Net Profit: +$292.00
= (+$1,284.00 Call option income +$0.00 dividend income -$992.00 capital appreciation)
Absolute Return: +1.3%
= +$292.00/$23,208.67
Equivalent Annualized Return: +41.7%
= (+$292.00/$23,208.67)*(365/11 days)
The
downside 'breakeven price' at expiration is at $232.08 ($244.92 - $12.84),
which is 5.2% below the current market price of $244.92.
2. Applied Materials Inc. (AMAT) -- New Covered Calls Position
02/23/2021 Bought 200 shares of Applied Materials Inc. @ $112.26 per share
02/23/2021 Sold 2 Applied Materials March 5th, 2021 $108.00 Call options @ $5.89 per share
Note: the Implied Volatility of the Call option was 34.5 when this buy/write limit order was executed.
02/24/2021 Ex-dividend of $.22 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $21,275.34
= ($112.26 - $5.89) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,178.00
= ($5.89 * 200 shares)
(b) Dividend Income: +$44.00
= $.22 per share x 200 shares
(c) Capital Appreciation (If Applied Materials stock is above $108.00 strike price at the March 5th options expiration): -$852.00
= ($108.00 -$112.26) * 300 shares
Total Net Profit: +$370.00
= (+$1,178.00 options income +$44.00 dividend income -$852.00 capital appreciation)
Absolute Return: +1.7%
= +$370.00/$21,275.34
Equivalent Annualized Return: +57.7%
= (+$370.00/$21,275.34)*(365/11 days)
Monday, February 22, 2021
Closed Positions in GoHealth Inc. and Pfizer Inc.
At the February 19th options expiration last Friday, two of the thirteen total Covered Calls positions expired with the stock price below their strike prices. Today both positions (GoHealth Inc. and Pfizer Inc.) were closed out by selling the stocks. Fortunately, both positions were closed out profitably, so all thirteen positions in the Covered Calls Advisor Portfolio that were closed out during the past month were profitable.
As detailed below, the return-on-investment results are as follows: (1) GoHealth Inc. -- +17.8% absolute
return in 182 days (equivalent to a +35.7% annualized
return-on-investment); and (2) Pfizer Inc. -- +0.3% absolute
return in 38 days (equivalent to a +2.8% annualized
return-on-investment). These results provide a good example of the advantage that can accrue from selling in-the-money Covered Calls. Despite the stocks declining to below their strike prices, a net profit was still achieved from the time value decay in the Call options, and also from dividend income received (in the case of Pfizer).
1. GoHealth Inc. -- Closed Out Covered Calls Position
The Buy/Write transaction was as follows:
08/24/2020 Bought 400 shares of GoHealth Inc. stock @ $15.00 per share
08/24/2020 Sold 4 GoHealth Sept 18th, 2020 $15.00 Call options @ $1.05 per share
Note: the Implied Volatility of these Calls was very high at 61.6 today when this transaction was made.
09/18/2020 GOCO Call options expired since stock closed below the strike price
09/23/2020 Sold 4 GOCO Oct 16th, 2020 $15.00 Call options at $.80 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $14.54 today when these Call options were sold.
10/16/2020 GOCO Call options expired since stock closed below the strike price
11/04/2020 Sold 4 GOCO Nov. 20th, 2020 $12.50 Call options at $.70 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $11.82 today when these Call options were sold.
11/20/2020 GOCO Call options expired since stock closed below the strike price
12/04/2020
Sold 4 GOCO Dec. 18th, 2020 $12.50 Call options at $.30 against the 400
shares of GoHealth stock to continue the GoHealth Covered Calls
position.
Note: the price of GOCO was $11.62 today when these Call options were sold.
12/18/2020 Bought-to-Close 4 GOCO Dec. 18th $12.50 Calls at $1.80
Note: the stock price was $14.24 when this transaction was executed, so the time value remaining in these Calls was $.06 =[$1.80 Call options price - ($14.24 stock price - $12.50 strike price)]
12/18/2020 Sold-to-Open 4 GOCO Jan. 15th, 2021 Call options at $.80 per share.
Note: the price of GOCO stock was $14.34 when these Calls were sold.
01/15/2021 Rollout transaction: Bought-to-Close 4 GOCO Jan. 15th, 2021 $15.00 Call options at $.07 per share and simultaneously Sold-to-Open 4 GOCO February 19th, 2021 $15.00 Calls at $1.44 per share. This rollout transaction occurred at a net credit of $1.37 ($1.44 - $.07) per share. The GOCO stock price was $15.01 when this transaction was executed.
02/19/2021 4 Feb. 19th Call options expired with the stock price below the $15.00 strike price.
02/22/2021 Sold 400 GOCO shares at $14.30 per share.
The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $5,582.68
= ($15.00 - $1.05) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,274.60
= ($1.05 + $.80 + $.70 + $.30 - $1.80 + $.80 +$1.44 - $.07) * 400 shares - $13.40 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (400 shares GoHealth stock sold at $14.30 per share): -$280.00
= ($14.30 assignment price - $15.00 stock purchase price) * 400 shares
Total Net Profit: +$994.60
= (+$1,274.60 options income +$0.00 dividend income -$280.00 capital appreciation)
Absolute Return: +17.8%
= +$994.60/$5,582.68
Equivalent Annualized Return-on-Investment: +35.7%
= (+$994.60/$5,582.68)*(365/182 days)
2. Pfizer Inc. (PFE) -- Closed Out Covered Calls Position
The buy/write transaction was:
01/15/2021 Bought 300 Pfizer shares @ $36.46
01/15/2021 Sold 3 Pfizer 02/19/2021 $35.00 Call options @ $1.91
Note: the Time Value (aka Extrinsic Value) in the Call options was $.45 per share = [$1.91 Call options premium - ($36.46 stock price - $35.00 strike price)]
01/28/2021 Quarterly ex-dividend of $.39 per share
02/19/2021 3 Feb. 19th PFE Call options expired with the stock price below the $35.00 strike price.
02/22/2021 Sold 300 Pfizer shares at $34.26 per share.
The overall performance results (including commissions) for this Pfizer Inc. Covered Calls position was follows:
Covered Calls Cost Basis: $10,367.01
= ($36.46 - $1.91) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$573.00
= ($1.91 * 300 shares)
(b) Dividend Income: +$117.00
= ($.39 dividend per share x 300 shares)
(c) Capital Appreciation (300 PFE shares sold at $34.26 per share): -$660.00
+($34.26 - $36.46) * 300 shares
Saturday, February 20, 2021
Recommended Reading -- #1
The Covered Calls Advisor wrote an article on this blog more than a decade ago now titled "On Being ASCCT Readers". I have been following the recommendations I espoused in this article for years now and it has, without a doubt, made me a better investor.
I am an avid reader daily of a variety of investing-related articles and information, and a few of you have indicated you would appreciate if I would share some of the articles I find most interesting and helpful. So, this will be the first in what I hope will become a once-a-week sharing of anywhere from one to five articles that I have read during the week that I found most worthwhile to share with you.
But for this #1 installment of "Recommended Reading", I would simply like to repeat the "On Being ASCCT Readers" article from the Covered Calls Advisor blog site (from 2007) which is provided below:
This article describes five techniques we should apply whenever we are reading investing-related information. We should seek to be ASCCT readers – that is Avid, Selective, Careful, Critical, and Thoughtful readers. Applying these five techniques will enable us to improve our ability to absorb and utilize the financial information we read so that we can ultimately be more successful as Covered Calls investors. I ask your forbearance in allowing me to express the following small bit of my personal philosophy on investing success and the associated importance of reading:
“Success comes from the application of knowledge.
Knowledge comes from seeking and absorbing truthful information.
Truthful information comes from listening, reading, thinking, and analyzing.”
So, to become a more successful Covered Calls investor, reading is an essential and fundamental tool.
Below is a more detailed presentation of the five keys to success in reading investing-related information:
1. Be an ‘Avid’ Reader – An ‘avid’ reader describes someone who simply loves to read. And if you really enjoy investing, which Covered Call investors invariably do, then you should probably be spending an average of a minimum of two hours a day reading investing-related information.
2. Be a ‘Selective’ Reader – As you know, there’s an incredible volume of investing information available for reading. So how do we focus on quality investing information and avoid the extraneous ‘noise’?
3. Be a ‘Careful’ Reader – This is very important! Because of the huge volume of items available to read, there is a natural tendency to speed-read or skim what we are reading so we can cover even more total quantity of material. Don’t do it!! If we have carefully chosen to read only ‘quality’ investing information (see step #2 above), then we must commit ourselves to fully read and concentrate on every sentence we are reading, and to read deliberately enough so that we seriously try to fully understand everything the author is trying to convey to us. You’ll be amazed at how much more in-depth understanding you can achieve by committing yourself to ‘careful’ reading.
4. Be a ‘Critical’ Reader –You already know this, but it’s worth repeating over and over again – “Don’t believe everything you read!” Utilize the analytical ability God gave you to critique the information you’re provided. Some of it will be totally true, some will be partially true, and some will be downright wrong. Analyze, analyze, analyze until your good common sense provides you increasing confidence that you are getting closer to the truth in whatever the particular subject you are reading about.
5. ‘Think’ About What You Have Read – The final critically important part of analyzing what we’ve read is simply thinking about it. This skill requires us to devote some quiet time to think about what we’ve read to assess its validity and what further analysis you might need to undertake. Find time (go for a walk; or sit in your favorite lounge chair; or whatever else works for you) and cut off the extraneous noise and other competing activities and think about what you’ve read. By the way, Warren Buffett is a great proponent of this quiet time thinking technique.
I hope you agree that to be a successful Covered Calls investor, we need to read avidly, selectively, carefully, critically, and thoughtfully. “ASCCT” if it helps you to remember it. I invite you to please try this approach during the next month. I’m confident you’ll be pleasantly surprised at how your investing knowledge, savvy, and confidence will begin to grow. If you do this, please email me and me know whether or not it works for you.
Best Wishes and Godspeed,
Jeff Partlow
The Covered Calls Advisor
partlow@cox.net
February 19th, 2021 Monthly Options Expiration Results
The Covered Calls Advisor Portfolio had thirteen positions since last month's (January 15th, 2021) monthly options expiration date. Eleven of these were closed in-the-money -- (1) Four expired in-the-money on the February 19th, 2021 monthly options expiration date; (2) Five expired in-the-money on their weekly options expiration date; (3) One was closed on the day prior to the ex-dividend date by Early Assignment; and (4) One Covered Calls position was unwound (closed out prior to its options expiration date) to achieve a significantly greater annualized return-on-investment than would have occurred if it was instead assigned on its initial expiration date). For all eleven positions, very attractive annualized return-on-investment results were achieved. The other two Covered Calls (GoHealth Inc. and Pfizer Inc.) expired on the February 19th expiration date with their Call options out-of-the-money (stock price below the strike price), so these long stock positions now remain in the Covered Calls Advisor Portfolio.
These thirteen Covered Calls positions demonstrate some important concepts of Covered Calls investing: (1) Good stock selection is Job #1; (2) Thoughtful strike price and options expiration date selection are very important considerations when initiating a position; and (3) Daily active monitoring of positions is helpful for identifying position management opportunities (such as closing out a position or rolling a position) prior to its options expiration date. The results for the thirteen positions during the past month are summarized as follows:
- Four Covered Call positions expired in-the-money yesterday on the February 19th, 2020 monthly options expiration date, so the Call options expired and the stocks were sold at their strike price. The return-on-investment results were as follows:
- Citigroup Inc. (C) -- +2.7%
absolute return in 36 days (equivalent to +26.9% annualized
return-on-investment). -- Link to Details of Original Citigroup Position
- Capital One Financial Corp. (COF) -- +1.1%
absolute return in 9 days (equivalent to +45.6% annualized
return-on-investment). -- Link to Details of Original Capital One Position
- KB Home (KBH) -- +2.4% absolute
return in 25 days (equivalent to +34.9% annualized return-on-investment). -- Link to Details of Original KB Home Position
- WestRock Company (WRK) -- +1.1% absolute return in 12 days (equivalent to +32.9% annualized return-on-investment). -- Link to Details of Original WestRock Position
- Five Covered Call positions expired in-the-money on their weekly options expiration dates (after last month's January 15th expiration date but prior to this month's February 19th, 2021 monthly options expiration date). The stocks were assigned (i.e. sold) at their strike prices with the following results:
- Lowe's Companies Inc. (LOW): +1.3%
absolute return in 17 days (equivalent to +27.3% annualized
return-on-investment). -- Link to Details of Original Lowe's Cos. Position
- Alibaba Group Holdings Ltd. (BABA): +4.2% absolute return in 53 days (equivalent to +28.8% annualized return-on-investment). -- Link to Results of Alibaba Position
- DraftKings Inc. (DKNG): +10.6% absolute return in 57 days (equivalent to +68.2% annualized return-on-investment). -- Link to Results of DraftKings Position
- Facebook Inc. (FB): +4.7% absolute return in 29 days (equivalent to +59.0% annualized return-on-investment). -- Link to Results of Facebook Position
- Morgan Stanley (MS): +1.8%
absolute return in 16 days (equivalent to +40.2% annualized
return-on-investment). -- Link to Results of Morgan Stanley Position
- One Covered Calls position in IBM Corp. was closed by Early Assignment on February 8th, 2020 (the last trading day prior to their ex-dividend date) so the stock was assigned (i.e. sold) at its $115.00 strike price with the following result: +0.7% absolute return in 6 days (equivalent to +44.8% annualized return-on-investment).
- One Covered Calls position in Citizens Financial Group Inc. (CFG) was closed early by the Covered Calls Advisor on February 4th, 2021. The stock had increased in price and with only $.10 time value remaining in the Call options but 15 days remaining until the options expiration date, the Covered Calls Advisor closed out the position with a Covered Calls unwind transaction -- 4 CFG 2/19/2021 $35.00 Calls were bought-to-close and 400 shares were simultaneously sold-to-close out the position entirely. A +2.2% absolute
return in 10 days (equivalent to +78.5% annualized return-on-investment) was achieved for this position.
- Finally, two February 19th, 2021 Covered Call positions (GoHealth Inc. and Pfizer Inc.) expired out-of-the-money, so their Call options expired and the two long stock positions remain in the Covered Calls Advisor Portfolio. A decision will be made early next week for these two companies to either sell these shares or
to continue
with the Covered Calls positions by selling future Call options against
the shares currently held.
As shown in the right sidebar, there are currently ten open positions in
the Covered Calls Advisor Portfolio. All transactions and
return-on-investment results for these positions will be posted on
this blog site on the same day the transactions occur. As always, I welcome your emails whenever you have any comments or questions related to Covered Calls investing.
Best Wishes,
Jeff
partlow@cox.net
Friday, February 19, 2021
Covered Call Position Established in Facebook Inc.
A new Covered Call position was established today in Facebook Inc. (FB) by purchasing 100 shares at $260.25 per share and selling one Call option at the $250.00 strike price with a March 5th, 2021 options expiration date for $13.35 per share. The Call option premium received was very attractive since the Implied Volatility (IV) of the Call was 33.4 when this position was established. A moderately in-the-money Covered Call position was established with a Delta of 72.9 (which approximates the 72.9% probability of assignment at the options expiration date).
The Covered Calls Advisor Portfolio has an existing Covered Call position in Facebook (also at the $250.00 strike price) that will expire in-the-money at market close today. Facebook seems to have the most attractive valuation metrics profile of the megacap tech stocks (i.e. the FAAMG group) and I want to retain a position in FB going forward. But with three hours remaining until the market close today, there was still $.26 time value remaining in the Feb. 19th $250 Call options. So, instead of immediately closing out the current position by rolling out to the March 5th, 2021 expiration date, I decided not to forgo the remaining $.26 per share profit (at the bid/ask midpoint price) in the existing position. Instead, I had sufficient cash to simply establish the new Facebook Covered Call position now and allow assignment at options expiration today to occur in order to achieve the maximum potential return-on-investment result for the original position.
As detailed below, a potential return-on-investment result for this Facebook position is:
+1.3% absolute
return in 15 days (equivalent to a +30.6% annualized
return-on-investment) if the stock closes above the $250.00 strike price at the March 5th, 2021 options expiration date.
Facebook Inc. (FB) -- New Covered Call Position
02/19/2021 Bought 100 Facebook shares @ $260.25
02/19/2021 Sold 1 Facebook 3/05/2021 $250.00 Call option @ $13.35.
A possible overall performance result (including commissions) for this Facebook Inc. Covered Call position is as follows:
Covered Call Cost Basis: $24,690.67
= ($260.25 - $13.35) * 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: +$1,335.00
= ($13.35 * 100 shares)
(b) Dividend Income: +$0.00
+($250.00 - $260.25) * 100 shares
Thursday, February 18, 2021
Established Covered Calls Position in Rio Tinto PLC Using the Dividend Capture Strategy
Today the Covered Calls Advisor's buy/write limit order was executed and a Covered Calls position was established in Rio Tinto PLC (ticker RIO) with a March 19th, 2021 options expiration date. Two hundred Rio Tinto shares were purchased at $87.38 and two Call options were sold at $5.74 at the $82.50 strike price -- so the net debit was $81.64 per share ($87.38 stock price - $5.74 Call options price). Therefore, an initial time value of $.86 per share ($82.50 strike price - $81.64 net debit cost basis) was achieved. The Delta was approximately 74.5 when this transaction was executed which closely approximates the probability that the Call options will be in-the-money (i.e. above the $82.50 strike price) on the options expiration date. There is an upcoming ex-dividend of $4.02 ($3.09 semi-annual dividend + $.93 special dividend) per share on March 4th which is prior to the March 19th options expiration date. So two potential return-on-investment results are detailed below and include both the possibility of early assignment on the day prior to the ex-dividend date as well as the scenario that the stock is in-the-money, and therefore assigned (i.e. sold at the $82.50 strike price), on the March 19th options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.1% absolute return (equivalent to +27.5% annualized return-on-investment for the next 14 days) if the stock is assigned early (business day prior to the March 4th ex-dividend date); OR
- +6.0% absolute return (equivalent to +72.7% annualized return over the next 30 days) if the stock is assigned on the March 19th options expiration date.
Rio Tinto PLC (RIO) -- New Covered Calls Position
02/18/2021 Bought 200 Rio Tinto shares @ $87.38
02/18/2021 Sold 2 RIO 3/19/2021 $82.50 Call options @ $5.74
Note: the Implied Volatility of the Call options was 26.8 when this transaction was executed.
03/04/2021 Upcoming quarterly ex-dividend of $4.02 ($3.09 semi-annual dividend + $.93 special dividend) per share
Two possible overall performance results (including commissions) for this Rio Tinto Covered Calls position are as follows:
Covered Calls Cost Basis: $16,329.34
= ($87.38 - $5.74) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,148.00
= ($5.74 * 200 shares)
(b) Dividend Income (If both options exercised early on March 3rd, the business day prior to the March 4th ex-div date): +$0.00; or
(b) Dividend Income (If RIO stock assigned at March 19th, 2021 expiration): +$804.00
= ($4.02 dividends per share x 200 shares)
= +($82.50 - $87.38) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $82.50 strike price on the March 19th options expiration date): -$976.00
= +($82.50 - $87.38) * 200 shares
These returns will be achieved as long as the stock is above the $82.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $77.62 ($87.38 -$5.74 -$4.02) provides 11.2% downside protection below today's stock purchase price.
Wednesday, February 17, 2021
Covered Calls Position Established in Raytheon Technologies Inc. Using Dividend Capture Strategy
Today a Covered Calls position was established in Raytheon Technologies Inc. (ticker symbol RTX) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $72.40 and 2 March 5th, 2021 Call options were sold at $3.06 per share at the $70.00 strike price. There is an upcoming ex-dividend of $.475 per share (a 2.6% annual dividend yield) on February 25th, 2021. Two potential return-on-investment results for this position are detailed below and include the possibility of early exercise since the ex-dividend is prior to the March 5th, 2021 options expiration date. Given the Covered Calls Advisor's current Overall Market Meter outlook, a conservative in-the-money Covered Calls position was established -- the Delta was 71.9, which approximates the probability of 71.9% that the Call options will be in-the-money on the options expiration date. Important to the Covered Calls Advisor, Raytheon has already reported their Q4 2020 earnings report, so there is no intervening earnings report prior to the March 5th options expiration date.
In early 2020, Raytheon merged with United Technologies (after they spun-out their Carrier and Otis Elevators divisions) making the new Raytheon a very strong company with approximately equal parts defense and commercial business revenues. The Covered Calls Advisor has noticed that often in the second year after a big event like a merger or change of CEO, the company achieves a substantial earnings improvement, and this seems likely in this case for Raytheon. In addition, Raytheon is in a very strong competitive position according to Morningstar, who rates it as having wide moats in 3 of its 4 business divisions (Collins Aerospace, Pratt & Whitney, and Raytheon Missiles and Defense) plus a narrow moat in its Intelligence and Space business. Of the 19 analysts covering Raytheon and tracked by Reuters Research, 15 have Outperform or Buy ratings, 4 have Neutral ratings, and none have Underperform or Sell ratings. Their average stock target price is $82.13 (13.4% above its current price).
As detailed below, two potential return-on-investment results are:
- +1.0% absolute return (equivalent to +43.4% annualized return for the next 8 days) if the stock is assigned early (business day prior to the February 25th ex-dividend date); OR
- +1.6% absolute return (equivalent to +35.1% annualized return over the next 17 days) if the stock is assigned on the March 5th options expiration date.
Raytheon Technologies Corporation (RTX) -- New Covered Calls Position
The buy/write transaction was:
02/17/2021 Sold 2 Raytheon 03/05/2021 $70.00 Call options @ $3.06
Note: the Time Value (aka Extrinsic Value) in the Call options was $.66 per share = [$3.06 Call options premium - ($72.40 stock price - $70.00 strike price)] when this transaction executed.
02/25/2021 Upcoming quarterly ex-dividend of $.475 per share
Two possible overall performance results (including commissions) for this Raytheon Covered Calls position are as follows:
Covered Calls Cost Basis: $13,869.34
= ($72.40 - $3.06) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$612.00
= ($3.06 * 200 shares)
(b) Dividend Income (If option exercised early on Feb. 24th, 2021, the business day prior to the Feb. 25th ex-div date): +$0.00; or
(b) Dividend Income (If Raytheon stock assigned at March 5th, 2021 options expiration): +$95.00
= ($.475 dividend per share x 200 shares)
+($70.00 strike price - $72.40 stock purchase price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $70.00 strike price at options expiration): -$480.00
+($70.00 - $72.40) * 200 shares
Either outcome would provide an attractive return-on-investment result for this Raytheon Technologies investment. These returns will be achieved as long as the stock is above the $70.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $68.865 ($72.40 -$3.06 -$.475) provides 4.9% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this Raytheon Technologies position, all nine criteria were met.
Established Cash-Secured Put Position in Regeneron Pharmaceuticals Inc.
Today, one 100% Cash-Secured Put option was sold in Regeneron Pharmaceuticals Inc. (ticker REGN) at the March 19th, 2021 $440.00 strike price at $7.00 per share when the stock price was $477.60 (7.9% above the strike price). This deep-out-of-the-money position had a Delta of 78.2 which approximates the probability of assignment at the options expiration date. A Cash-Secured Put option was sold instead of its comparable Covered Call in this case. The Open Interest in the Puts was 242 contracts versus zero Call contracts for the comparable strike price.
Regeneron is a biopharmaceutical company focused on treatments for eye diseases, cancer, dermatitis,and rheumatoid arthritis. This strong base business is fortified by its Emergency Use Authorization (EUA) Covid therapeutic in the short-term and the potential of its oncology research pipeline in the long-term. It is currently my favorite biotech company. It has declined dramatically in price in the last six months from a peak in the vicinity of $650 to its current level despite just reporting the highest revenues and earnings of any year in its history and a likely potential to exceed both revenue and earnings by an additional 30%+ in 2021. But they say "it's hard to catch a falling knife", so because of its recent substantial price decline (it is currently oversold on both a RSI(14) and RSI(2) basis), a more conservative than normal strike price was chosen. Consequently, as detailed below, a lower than normal annualized return-on-investment potential exists for this position. Given Regeneron's potential, the Covered Calls Advisor believes it represents a very good value at its current price and at its current relatively modest P/E ratio of 15.3. It also appeared as one of only 33 companies in my 'Best S&P 500 (Value and Profitability)' screener.
The 36.9 Implied Volatility for the Put option was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 22.7 -- so the $7.00 Put option price was a nice premium to receive for this deep-out-of-the-money (i.e. strike price well below the current stock price) Put option. Also important to the Covered Calls Advisor, there is no earnings report prior to the March 19th, 2021 options expiration date.
As detailed below for this Regeneron 100% Cash-Secured Put position, there is potential for a +1.6% absolute return in 31 days (equivalent to a +19.0% annualized return-on-investment).
Regeneron Pharmaceuticals Inc. (REGN) -- New 100% Cash-Secured Put Position
The transaction today was as follows:
02/17/2021 Sold 1 Regeneron March 19th, 2021 $440.00 100% Cash-Secured Put option @ $7.00 per share.
The Covered Calls Advisor does not use margin, so the detailed
information on this position and the potential result detailed below
reflect that this position was established using 100% cash
securitization for the one Put option sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Cost Basis: $43,300.67
= ($440.00 - $7.00) * 100 shares + $.67 commission
Net Profit:
(a) Options Income: +$699.33
= ($7.00 * 100 shares) - $.67 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If REGN stock is above $440.00 strike price at the March 19th expiration): +$0.00
= ($440.00 - $440.00) * 100 shares
Total Net Profit (If Regeneron stock price is above $440.00 strike price at options expiration): +$699.33
= (+$699.33 option income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Regeneron is above $440.00 strike price at the March 19th, 2021 options expiration) : +1.6%
= +$699.33/$43,300.67
Annualized Return: +19.0%
= (+$699.33/$43,300.67)*(365/31 days)
The
downside 'breakeven price' at expiration is at $433.00 ($440.00 - $7.00),
which is 9.3% below the current market price of $477.60.
Thursday, February 11, 2021
Covered Calls Established in Capital One Financial Corp.
A short-term Covered Calls position in Capital One Financial Corp.(ticker COF) was established with a February 19th, 2021 options expiration date. Two hundred shares of Capital One were purchased at $115.96 and two Call options were sold at $3.82 per share at the $113.00 strike price. A moderately in-the-money strike price was selected with a Delta (a good approximation of the probability of assignment at expiration) of 71.5. Importantly, there is no intervening earnings prior to the options expiration date as Capital One's 4th Qtr 2020 earnings were reported in late January, 2021.
There is an ex-dividend date next Tuesday (2/16) of $.40 per share, so capturing this dividend is included in the potential return-on-investment results detailed below. The time value obtained when this position was established was $.86 per share [$3.82 options premium - ($115.96 stock price - $113.00 strike price)]. In the unlikely event that the owner of these Call options exercises their option tomorrow afternoon (on the last business day before the ex-dividend date since the stock market is closed on Monday for Presidents Day), the Covered Calls Advisor would make a $169.32 profit [($.86 x 200 shares) - $2.68 commission] over the five day period.
A potential return-on-investment result if this position closes in-the-money at the February 19th options expiration date is +1.1% absolute
return in 9 days (equivalent to a +45.6% annualized
return-on-investment).
The simultaneous buy/write transaction was as follows:
02/11/2021 Bought 200 shares of Capital One stock @ $115.96 per share
02/11/2021 Sold 2 COF February 19th, 2021 $113.00 Call options @ $3.82 per share
Note: the Implied Volatility of the Call option was about 27.5
02/16/2021 Upcoming ex-dividend of $.40 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $22,429.34
= ($115.96 - $3.82) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$764.00
= ($3.82 * 200 shares)
(b) Dividend Income: +$80.00
= $.40 per share x 200 shares
(c) Capital Appreciation (If COF stock is above $113.00 strike price at the Feb. 19th options expiration): -$592.00
= ($113.00 -$115.96) * 200 shares
Total Net Profit: +$172.00
= (+$764.00 options income +$80.00 dividend income - $592.00 capital appreciation)
Absolute Return: +1.1%
= +$252.00/$22,429.34
Equivalent Annualized Return: +45.6%
= (+$252.00/$22,429.34)*(365/9 days)
These returns will be achieved if the stock is above the $113.00 strike price at the market closing on the February 19th, 2021 options expiration date. If the Capital One stock declines below the strike price, the breakeven price of $111.74 ($115.96 -$3.82 -$.40) provides 3.6% downside breakeven protection below today's purchase price.
Roll Up-and-Out Micron Technology Inc. Covered Calls
When the 200 shares of Micron Technology Inc. (ticker symbol MU) were trading at $85.24 today and the existing Covered Calls position was for the February 19th, 2021 expiration and at the $72.50 strike price, the Covered Calls Advisor's net debit limit order at $6.55 per share ($12.85 Buy-to-Close the Feb. 19th Calls at the $72.50 strike minus $6.30 Sell-to-Open the February 26th expiration at the $80.00 strike price) was executed (a few minutes after the order it was entered). The 200 Micron shares were deep-in-the-money, having spiked higher from the original purchase price on January 27th of $76.0865 to $85.24 this morning when the Covered Calls Advisor's debit spread limit order was executed.
Regarding the Covered Calls Advisor's "rolling" decision-making process:
I don't have a predetermined or automatic criteria (such as remaining time value in the existing Call options; or how deep-in-the-money the current stock price is) for deciding when to roll-up a Covered Calls position. But as a rule-of-thumb, if the stock price is more than 10% above the strike price, then I do regularly watch Call options pricing (including their Implied Volatility, their Delta, and their Bid/Ask spreads) for various future strike prices and expiration dates to determine if there is a desirable roll-up or roll-up-and-out opportunity.
This remains a conservative in-the-money Covered Calls position since the Delta for these new Calls when this rollout transaction was executed was 78.2 which closely approximates the probability of assignment at options expiration (i.e. 78.2% probability). Also as preferred by the Covered Calls Advisor, there is no quarterly earnings report for Micron prior to the new February 26th, 2021 options expiration date.
As detailed below, a potential return-on-investment result for this Micron Technology Inc. position is +4.2% absolute
return in 31 days (equivalent to a +49.8% annualized
return-on-investment) if the stock closes above the $80.00 strike price at the Feb. 26th options expiration.
Micron Technology Inc. (MU) -- Roll-Up-and-Out Covered Calls Position
The Buy/Write transaction was as follows:01/27/2021 Bought 200 shares of Micron Technology Inc. stock @ $76.0865 per share
01/27/2021 Sold 2 Micron Feb. 19th, 2021 $72.50 Call options @ $5.63 per share
02/11/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 MU Feb. 19th, 2021 $72.50 Call options at $12.85 per share and simultaneously Sold-to-Open 2 MU Feb. 26th, 2021 $80.00 Calls at $6.30 per share. This roll-up-and-out transaction occurred at a net debit of $6.55 ($12.85 - $6.30) per share. The price of Micron's stock was $85.24 when this net debit limit order was executed.
A possible overall performance result (including commissions) if the stock price is above the $80.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $14,092.64
= ($76.0865 - $5.63) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: -$186.68
= ($5.63 - $12.85 + $6.30) * 200 shares - $2.68 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron stock is above $80.00 strike price at the February 26th, 2021 options expiration): +$782.70
= ($80.00 - $76.0865) * 200 shares
Total Net Profit: +$596.02
= (-$186.68 options income +$0.00 dividend income + $782.70 capital appreciation)
Absolute Return: +4.2%
= +$596.02/$14,092.64
Equivalent Annualized Return: +49.8%
= (+$596.02/$14,092.64)*(365/31 days)
Wednesday, February 10, 2021
Roll-Up D.R. Horton Inc. Covered Calls Position
On February 1st, 2021, the Covered Calls Advisor established a Covered Calls position in D.R. Horton Inc. at the February 26th, 2021 $70.00 strike price. The price of the 200 D.R. Horton shares has spiked higher from the purchase price of $76.28 to $83.45 this afternoon when the Covered Calls Advisor's debit spread limit order was executed at a net debit of $8.98 per share ($13.43 - $4.45). DHI stock was at $83.45 when the transaction occurred, so there was only $.02 time value remaining [$83.45 stock price - ($70.00 strike price + $13.43 Call options bought-to-close price)] in the $70.00 Call options.
Note: I don’t have a predetermined remaining time value before acting, but when the stock price goes deep-in-the-money, I watch Call options pricing for various strike prices and expiration dates to see if there are roll-up or roll-up-and-out transactions that I find attractive.
DHI goes ex-dividend next Tuesday at $.20 per share and instead of the almost certainty that the shares would be assigned early this Friday (on the last business day prior to the ex-div date since the stock market is closed next Monday for Presidents Day), so the Covered Calls Advisor decided to roll-up to the $80.00 strike price at the same February 26th, 2021 options expiration date. The Delta for these $80.00 Calls was 72.2 when this transaction occurred, which approximates the probability that the Call options will be in-the-money on the Feb. 26th options expiration date.
A potential return-on-investment result for this D.R. Horton Covered Calls position is +3.4% absolute
return in 26 days (equivalent to a +48.3% annualized
return-on-investment) if the stock price closes above the $80.00 strike price on the February 26th options expiration date.
By rolling up the original Covered Calls, this result would exceed the +2.0% absolute return (+27.7% annualized) that was the maximum potential of the original Covered Calls position at the $70.00 strike price at expiration. In Covered Calls investing parlance, this is sometimes referred to as
"hitting a double" (instead of the usual "single"), since the roll-up
enables us to sell Calls twice against the original stock purchase (with both
being at the same options expiration date).
The detailed transactions and a potential result are provided below.
D.R. Horton Inc. (DHI) -- Roll-Up Covered Calls Position
The Buy/Write transaction was as follows:
02/01/2021 Bought 200 shares of D.R. Horton Inc. stock @ $76.28 per share
02/01/2020 Sold 2 D.R. Horton February 26th, 2021 $70.00 Call options @ $7.44 per share
Note: the Implied Volatility of the Calls was 40.8 which (as desired by the Covered Calls Advisor) was above the S&P 500 Volatility Index (VIX) reading of 32.1 when this transaction was executed.
02/10/2021 Roll-Up transaction: Bought-to-Close 2 DHI Feb. 26th, 2021 $70.00 Call options at $13.43 per share and simultaneously Sold-to-Open 2 DHI February 26th, 2021 $80.00 Calls at $4.45 per share. Note: the Implied Volatility of the $80.00 strike price Calls was 33.1 when this debit spread transaction was executed.
02/16/2021 Upcoming ex-dividend of $.20 per share
The overall performance results (including commissions) if assigned at expiration would be as follows:
Covered Call Cost Basis: $13,769.34
= ($76.28 - $7.44) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: -$310.68
= ($7.44 - $13.43 + $4.45) * 200 shares - $2.68 commissions
(b) Dividend Income: (If D.R. Horton stock is above $80.00 strike price at the Feb 26th options expiration):+$40.00
= $.20 per share x 200 shares
(c) Capital Appreciation (If D.R. Horton stock is above $80.00 strike price at the Feb 26th expiration): +$744.00
= ($80.00 - $76.28) * 200 shares
Total Net Profit (If D.R. Horton stock is above $80.00 strike price at the Feb 26th expiration): +$473.32
= (-$310.68 options income +$40.00 dividend income +$744.00 capital appreciation)
Absolute Return: +3.4%
= +$473.32/$13,769.34
Equivalent Annualized Return: +48.3%
= (+$473.32/$13,769.34)*(365/26 days)