A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Morgan Stanley (MS) covered calls as follows:Established Morgan Stanley (MS) Covered Calls for Jul2011:
06/03/2011 Bought 300 MS @ $22.988
06/03/2011 Sold 3 MS Jul2011 $25.00 Calls @ $.26
Note: the price of MS was $23.14 when the call options were sold.
Today, Morgan Stanley is trading at less than 80% of this year's expected tangible book value. The prior 10-year chart below shows that it is now priced at about 62% of book value per share versus a historical norm well above 100%.
With Morgan Stanley's primary financial metrics now improving, the stock's downside risk seems minimal and its upside potential for the next year is estimated to be 50% above its current price ($34.50 target price).Two possible overall performance results(including commissions) for the Morgan Stanley transactions would be as follows:
Stock Purchase Cost: $6,905.35
= ($22.988*300+$8.95 commission)
Net Profit:
(a) Options Income: +$66.80
= 300*$.26 - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MS unchanged at $22.988):
-$8.95 = ($22.988-$22.988)*300 - $8.95 commissions
(c) Capital Appreciation (If MS exercised at $25.00): +$594.65
= ($25.00-$22.988)*300 - $8.95 commissions
Total Net Profit(If MS unchanged at $22.988): +$57.85
= (+$66.80 +$0.00 -$8.95)
Total Net Profit(If MS exercised at $25.00): +$661.45
= (+$66.80 +$0.00 +$594.65)
Absolute Return if Unchanged at $22.988: +0.8%
= +$57.85/$6,905.35
Annualized Return If Unchanged (ARIU) +7.1%
= (+$57.85/$6,905.35)*(365/43 days)
Absolute Return if Assigned at $37.00: +9.6%
= +$661.45/$6,905.35
Annualized Return If Assigned (ARIA) +81.3%
= (+$661.45/$6,905.35)*(365/43 days)
The downside breakeven price at expiration is at $22.73 ($22.988 - $.26).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until July2011 options expiration) for this Morgan Stanley (MS) covered calls position is 56.3%. This compares with a probability of profit of 51.3% for a buy-and-hold of Morgan Stanley (MS) over the same time period.
