Established New Positions in Capital One Financial Corporation and Global Payments Inc.

This morning, two new positions were established in the Covered Calls Advisor Portfolio. A Covered Call position in Capital One Financial (ticker COF) with the purchase of 100 shares at $102.32 and the simultaneous sale of one November 18th, 2022 $97.50 Call option at $5.81 per share. I intended to purchase 200 shares but I neglected to follow my normal process of double-checking my order before entering it, so my broker's default setting of 100 shares for Covered Calls was executed. The time value was $.49 per share = [$5.81 Call option premium - ($102.32 stock price - $97.50 strike price)]. There is an ex-dividend date this Thursday (November 10th) at $.60 per share (2.3% annualized dividend yield) which is prior to the November 18th options expiration date, so this dividend amount is included in the potential return-on-investment calculations below. The Implied Volatility of these Call options was 36.0 when this transaction was executed and the Delta was 76.9 which approximates a 76.9% probability of the Call option being in-the-money (an therefore assigned) at the options expiration date and there is no earnings report prior to the November 18th options expiration date. 

Also this morning, a short-term (12 days) 100% Cash-Secured Put options position was established in Global Payments Inc. (ticker GPN) at the November 18th, 2022 options expiration date and at the $90.00 strike price.  Two Puts were sold at $.85 per share when the stock price was approximately $95.96 (6.6% above the strike price).  The Implied Volatility of these Puts was 41.7 when this position was established.  Establishing positions where the Implied Volatility is greater than that of the S&P 500 Index (i.e. VIX), which is currently at 24.7, is strongly preferred by the Covered Calls Advisor.  This preference is the fifth of the twelve investing "edges" (see here) utilized that contributes to our achieving outperformance in comparison with that of the benchmark S&P 500 Index.

The probability that Global Payments stock is above the strike price on the November 18th options expiration date (in which case the Puts expire worthless and the maximum potential profit is achieved) was 81.6% when this position was established.  Just prior to establishing this position, a comparison was made to determine whether establishing a Covered Calls position or a Cash-Secured Puts position would be preferable.  For this Global Payments position, selling the Puts was preferable since it provided the potential for a slightly higher annualized-return-on-investment.  A key reason for this was because the Bid/Ask spread of $.80 for the Calls (and which had an Open Interest of only 3 contracts) was very large compared with that of the Puts whose Bid/Ask spread was only $.30 (and which had an Open Interest of 817 contracts).

Finally, as desired, the next quarterly earnings report for both positions occurs after their November 18th options expiration dates.

1. Capital One Financial Corporation (COF) -- New Covered Call Position

As detailed below, a potential return-on-investment result is +1.6% absolute return (equivalent to +49.9% annualized return for the next 12 days) if the stock price is in-the-money (i.e. above the $97.50 strike price) and therefore assigned on the November 18th, 2022 options expiration date.

The Buy/Write limit order transaction was as follows:
11/7/2022 Bought 100 shares of Capital One stock @ $102.32 per share 
11/7/2022 Sold 1 COF Nov. 18th, 2022 $97.50 Call options @ $5.81 per share

A possible overall performance result (including commissions) for this Capital One Covered Call position is as follows:
Covered Call Net Investment: $9,651.67
= ($102.32 - $5.81) * 100 shares + $.67 commission

Net Profit:
(a) Options Income: +$580.33
= ($5.81 * 100 shares) - $.67 commission
(b) Dividend Income: +$60.00 = $.60 per share X 100 shares

(c) Capital Appreciation (If 100 COF shares assigned at $97.50 strike price at expiration): -$482.00
+($97.50 - $102.32) * 100 shares

Total Net Profit (If 100 Capital One shares assigned at $97.50 strike price at expiration): +$158.33

= (+$580.33 options income +$60.00 dividend income -$478.66 capital appreciation)

 

Potential Absolute Return-on-Investment (If COF stock assigned at the options expiration date): +1.6%

= +$158.33/$9,651.67

Potential Annualized Return-on-Investment: +49.9%

= (+$158.33/$9,651.67) * (365/12 days)

2. Global Payments Inc. (GPN) -- New 100% Cash-Secured Puts Position

As detailed below for this Global Payments 100% Cash-Secured Puts position, there is potential for a +0.9% absolute return in 12 days (equivalent to a +28.8% annualized return-on-investment).

The transaction today was as follows:
11/7/2022  Sold 2 Global Payments Nov. 18th, 2022 $90.00 100% Cash-Secured Put options @ $.85 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 two Global Payments Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Net Investment: $17,831.34
= ($90.00 - $.85) * 200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$168.66
= ($.85 * 200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Global Payments stock is above the $90.00 strike price at the Nov. 18th options expiration): +$0.00
= ($90.00 - $90.00) * 200 shares

Total Net Profit (If Global Payments stock price is out-of-the-money (above $90.00 strike price) at options expiration): +$168.66
= (+$168.66 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return-on-Investment: (If stock is above $90.00 strike price at the Nov. 18th, 2022 options expiration) : +0.9%
= +$168.66/$17,831.34
Annualized Return-on-Investment: +28.8%
= (+$158.66/$15,838.66) * (365/12 days)

The downside 'breakeven price' at expiration of $89.15 ($90.00 - $.85) is 7.1% below the current market price of $95.96.


Regards and Godspeed,
Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net