08/20/2012 Bought 700 VALE shares @ $17.66
08/20/2012 Sold 7 VALE Sep2012 $17.00 Call Options @ $1.09
Note: the price of Vale shares was $17.71 today when these options were sold.
A possible overall performance result (including commissions) for this Vale SA ADR (VALE) covered calls position is as follows:
Stock Purchase Cost: $12,370.95
= ($17.66*700+$8.95 commission)
Net Profit:
(a) Options Income: +$748.80 = ($1.09 X 700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VALE assigned at $17.00 upon expiration): -$470.95
=+($17.00-$17.66)*700 - $8.95 commissions
Total Net Profit (If VALE assigned at $17.00 at Sep2012 expiration): +$277.85
= (+$748.80 +$0.00 -$470.95)
Absolute Return (If VALE assigned at $17.00 at Sep2012 expiration): +2.2%
= +$277.85/$12,370.95
Annualized Return (If stock assigned): +24.8%
= (+$277.85/$12,370.95)*(365/33 days)
The downside 'breakeven price' at expiration is at $16.57 ($17.66 - $1.09). Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held 33 days until Sep2012 options expiration) for this Vale SA ADR covered calls position is 72.2%. This compares with a probability of profit of 50.0% for a buy-and-hold of Vale over the same time period.
The 'crossover price' at expiration is $18.09 ($17.00 + $1.09). This is the price above which it would have been more profitable to simply buy-and-hold VALE stock until September 22, 2012 (the Sep2012 options expiration date) rather than establishing the covered calls position. The probability of exceeding this crossover price at expiration is 41.1%.
