Established Covered Calls in PayPal Holdings Inc.

At 9:53am this morning, a short-term Covered Calls position was established by buying 400 shares of PayPal Holdings Inc. (ticker symbol PYPL) stock at $67.33 and simultaneously selling 4 July 14th, 2023 $65.00 Call options at $2.86 per share -- at the buy/write net debit limit order of $64.47 per share -- so the time value was $.53 per share [$2.86 Call options premium - ($67.33 stock purchase price - $65.00 strike price)].  The approximate probability that this position will be in-the-money and therefore assigned on the options expiration date is 75.0%.  Also important is the fact that the next quarterly earnings report on August 2nd, 2023 is after the July 14th options expiration date.

PayPal's FY2023 estimated P/E Ratio is 13.7 which is very attractive based on their ongoing growth potential and the discounted P/E relative to the S&P 500 and also their historical valuation.  PayPal has beat earnings estimates for each of the last 4 quarters and their projected continuing earnings growth every quarter this year is projected to exceed that of the prior year for the comparable quarter.  The forty-five Wall Street analysts that now cover PayPal agree with me that the stock is currently undervalued. Their average target price is $91.33 which is +35.6% upside from today's purchase price.    
 

As detailed below, a potential outcome for this PayPal investment is +0.8% absolute return-on-investment for the next 10 days (equivalent to +29.6% annualized-return-on-investment) if the stock closes above the $65.00 strike price on the July 14th, 2023 options expiration date.

PayPal Holdings Inc. (PYPL) -- New Covered Calls Position

The net debit buy/write limit order was executed as follows:
7/5/2023 Bought 400 shares of PayPal stock @ $67.33 per share 
7/5/2023 Sold 4 PYPL July 14th, 2023 $65.00 Call options @ $2.86 per share
Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of the Calls was 31.4 when this position was established.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Net Investment: $25,790.68
= ($67.33 - $2.86) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,141.32
= ($2.86 * 400 shares) - $2.68 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PYPL stock is above the $65.00 strike price at the July 14th expiration): -$932.00
= ($65.00 -$67.33) * 400 shares

Potential Total Net Profit (If assigned at expiration): +$209.32
= (+$1,141.32 options income +$0.00 dividend income -$932.00 capital appreciation)

Potential Absolute Return-on-Investment: +0.8%
= +$209.32/$25,790.68
Potential Equivalent Annualized-Return-on-Investment: +29.6%
= (+$209.32/$25,790.68) * (365/10 days)

Early Assignment of Covered Calls Position in JPMorgan Chase & Co.

Overnight I was notified by my broker that the three JPMorgan Chase & Co. (ticker JPM) July 14th, 2023 $135.00 Call options were exercised yesterday.  JPMorgan stock has had a significant increase from its purchase price of $138.28 on June 28th to $146.61 at the market close yesterday.  During this one-week period, all 23 of the largest U.S. bank stocks (including JPMorgan which is the largest U.S. bank) passed the Federal Reserve's stress tests -- and their stock prices have benefited as a result.  

The original $1.10 time value in the Calls when the position was established had declined at yesterday's market close to $0.16 per share at the Call options Bid/Ask midpoint price, so I was not surprised that (with a $1.00 ex-dividend today and ten days remaining until the options expiration date), the owner of these JPMorgan Calls exercised their option to buy the 300 shares at the $135.00 strike price in order to capture the dividend.  

There are two reasons I am pleased for this early assignment, despite losing the opportunity to capture tomorrow's (since today is a holiday) $1.00 per share ex-dividend:
1. The +42.6% annualized-return-on-investment (aroi) achieved by early assignment is greater than the +33.6% aroi that would have been achieved 10 days from today if this position remained in-the-money and so instead would be assigned on its July 14th options expiration date; and
2. JPMorgan's Q2 2023 earnings report is before market open on July 14th (the options expiration date).  Because of the normal stock price volatility on the earnings reporting date (albeit sometimes positive but also sometimes negative), I strongly prefer not holding any company's stock on the day of their quarterly earnings report. 

The post when this JPMorgan Chase & Co. Covered Calls position was originally established is here.  As detailed below, the return-on-investment result for this position was +0.8% absolute return in 7 days (equivalent to a +42.6% annualized return-on-investment).  

JPMorgan Chase & Co. (JPM) -- Covered Calls Position Closed Out by Early Assignment

The simultaneous buy/write transaction was:
6/28/2023 Bought 300 JPMorgan Chase & Co. shares @ $138.28 

6/28/2023 Sold 3 JPM July 14th, 2023 $135.00 Call options @ $4.38 per share.
7/4/2023 This JPMorgan Covered Calls position was closed out by early assignment.  The owner of the JPM Calls exercised their option, so the Calls expired worthless and the 300 JPMorgan shares were sold at the $135.00 strike price.

The overall performance results (including commissions) for this JPM Covered Calls position were as follows:
Stock Purchase Net Investment: $40,172.01
= ($138.28 - $4.38) * 300 shares + $2.01 commission

Net Profit:
(a) Options Income: +$1,311.99
= ($4.38 * 300 shares) - $2.01 commission
(b) Dividend Income (JPM Call options were exercised early on July 3rd, the last business day prior to the July 5th ex-div date): +$0.00

(c) Capital Appreciation (JPM shares assigned early): -$984.00
+($135.00 selling price -$138.28 purchase price) * 300 shares

Total Net Profit: +$327.99

= (+$1,311.99 options income +$0.00 dividend income -$984.00 capital appreciation)

Absolute Return-on-Investment: +0.8%

= +$327.99/$40,172.01

Annualized Return-on-Investment: +42.6%

= (+$327.99/$40,172.01) * (365/7 days)

Best Wishes,

Jeff Partlow
The Covered Calls Advisor
partlow@cox.net

Continuation of Covered Calls Position in iShares Large-Cap China ETF

This past Friday, the June 30th, 2023 $27.35 Covered Calls position in iShares China Large-Cap ETF (ticker FXI) closed slightly out-of-the-money, so the Calls expired and 900 FXI shares remained in the Covered Calls Advisor Portfolio.  This morning, the Covered Calls position was continued by rolling up-and-out to the July 14th, 2023 $27.85 strike price at $.56 per share when FXI's price was $27.84. 

I am establishing ongoing Covered Calls positions in iShares China Large-Cap ETF because of my now bullish outlook for China's stock market.  Although the U.S. market (measured the S&P 500) has outperformed the iShares China Large-Cap ETF during the past dozen years, I believe this history is poised to begin to inflect to outperformance by China.  China's economic growth is likely to exceed our U.S.GDP growth in upcoming years, and while our Federal Reserve continues its economic tightening policy, China has now initiated a stimulative monetary loosening strategy.  Another reason for my contention about the two countries' respective stock markets going forward relates to stock price valuations.  FXI's valuation metrics currently trade at only about one-half of that of the S&P 500: (1) a trailing twelve-months P/E of 9.0 for FXI versus 21.5 for SPY; and (2) a forward PEG Ratio of 1.0 for FXI compared to 2.0 for SPY.  The overwhelming majority of my investments will continue to be in U.S.-based companies, but I believe now is a fortuitous time to include more international diversification in my Covered Calls Advisor Portfolio.

As detailed below, a potential return-on-investment result is +5.1% absolute return-on-investment (equivalent to +74.9% annualized return-on-investment for the 25 days holding period) if the stock price is in-the-money (i.e. above the $27.85 strike price) and therefore assigned on the July 14th, 2023 options expiration date.

iShares China Large-Cap ETF (FXI) -- Covered Calls Position Continued 
The Buy/Write transaction was as follows:
6/20/2023 Bought 900 shares of iShares China Large-Cap ETF @ $27.87 per share 
6/20/2023 Sold 9 FXI June 30th, 2023 $27.35 Call options @ $.86 per share
6/30/2023 Nine FXI Calls expired out-of-the-money so the 900 shares remained in the Covered Calls Advisor Portfolio.
07/3/2023 Continued this iShares China Large-Cap ETF Covered Calls position by selling 9 FXI July 14th, 2023 Call options at the  $27.85 strike price for $.56 per share.  The FXI share price was $27.84 when these Calls were sold and their Implied Volatility was 27.3.

A possible overall performance result (including commissions) for this iShares China Large-Cap ETF Covered Calls position is as follows:
FXI Covered Calls Net Investment: $24,315.03
= ($27.87 - $.86) * 900 shares + $6.03 commission

Net Profit Potential:
(a) Options Income: +$1,265.94
= ($.86 + $.56) * 900 shares - $12.06 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If 900 iShares China Large-Cap ETF shares assigned at $27.85 strike price at the July 14th options expiration date): -$18.00
+($27.85 - $27.87) * 900 shares

Potential Total Net Profit (If 900 iShares China Large-Cap ETF shares assigned at $27.85 strike price upon options expiration): +$1,247.94
= (+$1,265.94 options income +$0.00 dividend income -$18.00 capital appreciation)

Absolute Return-on-Investment Potential: +5.1%
= +$1,247.94/$24,315.03
Annualized Return-on-Investment Potential: +74.9%
= (+$1,247.94/$24,315.03) * (365/25 days)

June 30th, 2023 Options Expiration Results

The Covered Calls Advisor Portfolio had four Covered Calls positions with June 30th, 2023 options expirations.  Three of these positions (Cigna Group, General Motors Company, and Gilead Sciences Inc.) closed in-the-money so their Calls expired and the shares were called away (i.e. sold) at their respective strike prices.  The fourth position in iShares China Large-Cap ETF (FXI) closed slightly out-of-the-money so the Calls expired and the 100 FXI shares remain in the Covered Calls Advisor Portfolio.  Finally, I was notified early this morning by my broker that my Covered Calls position in the iShares 20+ Year Treasury Bond ETF was exercised yesterday, so my TLT Covered Calls position was closed out profitably by early assignment.  A summary of the results for each of these five positions is as follows:

1. Cigna Group -- -0.5% absolute return (equivalent to -1.6% annualized return-on-investment) for the 122 days of this investment.  This Covered Call position was assigned at the $270.00 strike price on its 6/30/2023 options expiration date since Cigna closed in-the-money at $280.60 per share.  The final post detailing the history of this Covered Call position is here. 

2. General Motors Company -- +1.1% absolute return (equivalent to +36.7% annualized return-on-investment) for the 11 days of this investment.  This Covered Calls position was assigned at the $36.00 strike price on its 6/30/2023 options expiration date since GM closed in-the-money yesterday at $38.56 per share.  The original post detailing this Covered Calls position is here. 

3. Gilead Sciences Inc. -- +1.7% absolute return (equivalent to +27.5% annualized return-on-investment) for the 22 days of this investment.  This Covered Calls position was assigned at the $76.00 strike price yesterday on its 6/30/2023 options expiration date since Gilead stock closed in-the-money at $77.07 per share.  The original post detailing this Covered Calls position is here. 

4. iShares China Large-Cap ETF (FXI) -- FXI's price closed yesterday at $27.19 which was slightly below its $27.35 strike price, so the nine 6/30/2023 iShares China Large-Cap ETF Call options expired and 900 FXI shares now remain in the Covered Calls Advisor Portfolio.  Early next week a decision will be made to either close out the position by selling the shares or continuing with this Covered Calls position by selling nine FXI Call against the 900 FXI shares currently owned.  

5. iShares 20+ Year Treasury Bond ETF (TLT) -- My Covered Calls position in the iShares 20+ Year Treasury Bond ETF at the July 7th, 2023 expiration and the $101.00 strike price was exercised yesterday, so my TLT Covered Calls position was closed out profitably by early assignment.  I was expecting that these Calls would be exercised yesterday (Friday, June 30th) since there was only $.02 time value remaining in the Calls and the ex-dividend date is on Monday (July 3rd).  This position achieved a net profit of $90.99 in two days. 

I welcome your feedback, at my email address shown below, on any of these positions or on any topics related to the Covered Calls investing strategy.

Best Wishes,

Jeff Partlow
The Covered Calls Advisor
partlow@cox.net