Established HollyFrontier Corporation Covered Calls -- Example of Possible Early Assignment or Dividend Capture

Today, a new covered calls position was established in HollyFrontier Corp (Ticker Symbol HFC) with a Jun2014 expiration and at the $47.00 strike price. The transactions are as follows:

5/23/2014 Bought 300 HFC shares @ $49.32
5/23/2014 Sold 3 HFC Jun2014 $47.00 Call Options @ $2.65
Note: the price of HFC was $49.38 today when these options were sold.
5/28/2014 Ex-dividend for special dividend of $.50 per share
6/4/2014 Ex-dividend of $.32 for quarterly dividend of $.32 per share

This covered calls investment is a strategic one that explicitly considers the upcoming special dividend of $.50 and also the quarterly dividend of $.32.  If the current time value (i.e. extrinsic value) of $.33 [$2.65 option premium - ($49.32 stock price - $47.00 strike price)] remaining in the short call option decays further prior to the ex-div dates, then there is a possibility that the call options owner will exercise early and will call the stock away to capture the dividend(s). 

As shown below, three potential returns for this position are:

If Early Assignment: +0.5% absolute return (equivalent to +38.9% annualized return for the next 5 days) if the stock is assigned early (day prior to May 28th ex-div date); OR

If Early Assignment: +1.5% absolute return (equivalent to +47.0% annualized return for the next 12 days) if the stock is assigned early (day prior to June 4th ex-div date); OR

If Both Dividends Captured:  +2.2% absolute return (equivalent to +26.7% annualized return over the next 30 days) if the stock is assigned at Jun2014 expiration on June 20th.

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but any of these three outcomes would provide a very good return on investment result.  These returns will be achieved as long as the stock is above the $47.00 strike price at Jun2014 expiration.   

In summary, this covered calls investment provides a very nice annualized ROI potential for a conservative (hedged with substantial downside protection and the next earnings announcement is after the Jun2014 options expiration date) investment. 

Three possible overall performance results (including commissions) for this HollyFrontier Corp (HFC) covered calls position are as follows:
Stock Purchase Cost: $14,804.95
= ($49.32*300+$8.95 commission)

Net Profit:
(a) Options Income: +$783.80
= ($2.65*300 shares) - $11.20 commissions
(b) Dividend Income (If option exercised early on day prior to May 28th ex-div date): +$0.00; or
(b) Dividend Income (If option exercised early on day prior to June 4th ex-div date): +$150.00 = $.50*300 shares; or
(b) Dividend Income (If stock assigned on Jun2014 options expiration date): +$246.00
= ($.50 + $.32)  dividends per share x 300 shares)

(c) Capital Appreciation (If stock assigned early on May 27th): -$704.95
+($47.00-$49.32)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned early on June 3rd): -$704.95
+($47.00-$49.32)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $47.00 at Jun2014 expiration): -$704.95
=+($47.00-$49.32)*300 - $8.95 commissions

Total Net Profit (If option exercised on day prior to May 28th ex-div date): +$78.85
= (+$783.80 +$0.00 -$704.95); or
Total Net Profit (If option exercised on day prior to June 4th ex-div date): +$228.85
= (+$783.80 +$150.00 -$704.95); or
Total Net Profit (If stock assigned at $47.00 on Jun2014 options expiration date): +$324.85

= (+$783.80 +$246.00 -$704.95)

1. Absolute Return (If option exercised on day prior to May 28th ex-div date): +0.5%
= +$78.85/$14,804.95
Annualized Return (If option exercised on May 27th): +38.9%
= (+$78.85/$14,804.95)*(365/5 days); OR

2. Absolute Return (If option exercised on day prior to June 4th ex-div date): +1.5%
= +$228.85/$14,804.95
Annualized Return (If option exercised on June 3rd): +47.0%
= (+$228.85/$14,804.95)*(365/12 days); OR

3. Absolute Return (If stock assigned at $47.00 at Jun2014 options expiration date): +2.2%
= +$324.85/$14,804.95
Annualized Return (If stock assigned on Jun2014 options expiration date): +26.7%

= (+$324.85/$14,804.95)*(365/30 days);

Continuation -- Citigroup Inc. Covered Calls

Upon May2013 options expiration, the $49.00 call options expired.  Today, the covered calls position was re-established at the $48.00 strike price by selling 7 Jun2014 $48.00 call options.  As detailed below, this investment will provide an overall +1.9% absolute return in 89 days (which is equivalent to a +7.9% annualized return) if the stock closes at or above the $48.00 strike price at options expiration on June 20th.
The details of the associated transactions and a potential return-on-investment result are as follows:

1. Citigroup Inc. (C)
The transactions are as follows:

3/24/2014 Sold 7 Apr2014 $49.00 Puts @ $.89

Note: The price of Citi was $50.03 when this transaction was executed.
4/19/2014 Seven Citigroup Put options expired
Note: The price of Citi was $48.22 upon Apr2014 options expiration
4/22/2014 Sold 7 Citigroup May2014 $49.00 call options at $.62 to establish a covered calls position
Note: The price of Citi was $48.28 when these Call options were sold
5/01/2014 Ex-dividend $7.00 = ($.01*700 shares)
5/16/2014 Seven Citigroup Call options expired
5/22/2014 Sold 7 Citigroup Jun2014 $48.00 Call options at $.49
Note: the price of Citi was $47.10 when these Calls were sold

Two possible overall performance results (including commissions) would be as follows:

100% Cash-Secured Cost Basis: $34,300.00
= $49.00*700

Net Profit:

(a) Options Income: +$1,357.40

= ($.89 + $.62+$.49)*700 shares - 3*$14.20 commissions

(b) Dividend Income: +$7.00

(c) Capital Appreciation (If C remains unchanged at current price of $47.10 upon Jun2014 expiration): -$1,330.00

= ($47.10-$49.00)*700 shares; OR
(c) Capital Appreciation (If C closes above the $48.00 strike price at Jun2014 options expiration): -$700.00
= ($48.00-$49.00)*700 shares

Total Net Profit (If Citi remains unchanged at current $47.10 price upon Jun2014 expiration): +$34.40 

= (+$1,357.40 +$7.00 -$1,330.00); OR 

Total Net Profit (If Citi is above $48.00 strike price at Jun2014 options expiration): +$664.40 

= (+$1,357.40 +$7.00 -$700.00)

1.  If Citi remains unchanged at current $47.10 stock price upon Jun2014 options expiration:
Absolute Return: +0.1%
= +$34.40/$34,300.00
Equivalent Annualized Return: +0.4%
= (+$34.40/$34,300.00)*(365/89 days); OR

2. If Citi closes above $48.00 strike price upon Jun2014 options expiration:
Absolute Return: +1.9%
= +$664.40/$34,300.00
Equivalent Annualized Return: +7.9%
= (+$664.40/$34,300.00)*(365/89 days)

Continuation -- Fusion-io Inc. Covered Calls

Upon May2013 options expiration, the 100% cash-secured puts position in Fusion-io Inc. (Ticker Symbol FIO) expired with the stock closing at $8.09 which was below the $9.00 strike price.  So, 700 shares of Fusion-io were assigned to the Covered Calls Advisor Portfolio.  Today, a covered calls position was established at the $9.00 strike price by selling 7  Jun2014 $9.00 call options.  As detailed below, this investment will provide an overall +7.7% absolute return in 54 days (which is equivalent to a +52.0% annualized return) if the stock closes at its current price of $8.63 at options expiration on June 20th.

The details of the associated transactions and two potential return-on-investment results are as follows:

1. Fusion-io Inc. (FIO)
The transactions are as follows:
04/28/2014 Sold 7 Fusion-io Inc. (FIO) May2014 $9.00 Put Options @ $.80
Note: the price of FIO was $8.40 when these Puts were sold.
05/16/2014 FIO put options expired, so 700 shares of FIO were purchased at $9.00
Note: the price of FIO was $8.09 on the May2014 options expiration date
05/21/2014 Sold to Open 7 FIO Jun2014 $9.00 Call options @ $.30
Note: the price of FIO was $8.63 when these call options were sold

Two possible overall performance results(including commissions) for these FIO transactions would be as follows:
100% Cash-Secured Cost Basis: $6,300.00
= $9.00*700

Net Profit:
(a) Options Income: +$743.60
= ($.80+$.30) *700 shares - 2*$13.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FIO remains unchanged at $8.63 price upon Jun2014 expiration): -$259.00
= ($8.63-$9.00)*700 shares
(c) Capital Appreciation (If FIO closes above $9.00 strike price upon Jun2014 expiration):
+$0.00 = ($9.00-$9.00)*700 shares

Total Net Profit (If FIO remains unchanged at $8.63 price upon Jun2014 expiration): +$484.60  = (+$743.60 +$0.00 -$259.00)
Total Net Profit (If FIO is above $9.00 strike price at Jun2014 options expiration): +$743.60 = (+$743.60 +$0.00 +$0.00)

1. Absolute Return (If FIO remains unchanged at $8.63 price at Jun2014 options expiration and Put options thus expire worthless): +7.7%
= +$484.60/$6,300.00
Annualized Return (If stock price unchanged at $8.63 at expiration): +52.0%
= (+$484.60/$6,300.00)*(365/54 days); OR

2. Absolute Return (If FIO stock price is above $9.00 upon Jun2014 expiration and Put options thus expire worthless): +11.8%
= +$743.60/$6,300.00
Annualized Return (If stock price above $9.00 at expiration): +79.8%
= (+$743.60/$6,300.00)*(365/54 days)

May 2014 Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained three positions with May 2014 expirations. A summary of the results is as follows:

- One of the three positions (Noble Corporation) was closed out at expiration. This was the optimal result for this covered calls position in that the maximum potential return-on-investment (ROI) result from when this May position was established was actually achieved. The annualized ROI result for this closed position is:
Noble Corporation = +2.0% absolute return (equivalent to +41.1% annualized return for the 18 days holding period)

The detailed transactions history and result is detailed below. The cash available from the closing of this position will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established (most likely during the next week).  Any new positions for Jun2014 will be posted on this blog the same day they occur.

- Two of the three positions ended May2014 expiration with long stock positions (Citigroup Inc. and Fusion-io Inc.).  The seven Citigroup covered calls had their call options expire since the stock price closed Friday at $46.44, well below the May2014 options' $49.00 strike price. So, the Covered Calls Advisor Portfolio (CCAP) continues to own 700 long shares in Citigroup.  The seven 100% cash-secured Put options in Fusion-io were assigned at the $9.00 strike price since the stock closed last Friday (May2014 options expiration date) at $8.09.  As a result, the portfolio now owns 700 shares of Fusion-io.  Decisions will be made early this week to either sell these Citigroup and Fusion-io shares or to continue with covered calls positions by selling June 2014 call options against the current long stock holdings. When these decisions are made and the accompanying transactions are completed, a post will be made on this blog on the same day with the transaction details and potential performance results.

Details of the transactions and the associated return-on-investment result for the closed Noble Corp. position is as follows:

1. Noble Corporation (NE) -- Closed
The transactions were as follows:
04/30/2013 Bought 700 NE shares @ $30.464
04/30/2013 Sold 7 NE May2014 $30.00 Call Options @ $.74
Note: the price of NE was $30.464 today when these options were sold.
05/01/2014 Ex-dividend of $.375 per share
05/16/2014 Call options assigned and stock sold at $30.00 strike price
Note: NE stock price was $30.03 upon market close on May2014 options expiration

The overall performance result (including commissions) for these Noble Corp covered calls was as follows:
Stock Purchase Cost: $21,333.75
= ($30.464*700+$8.95 commission)

Net Profit:
(a) Options Income: +$503.80
= 700*$.74 - $14.20 commissions
(b) Dividend Income: +$262.50 = $.375 per share * 700 shares
(c) Capital Appreciation (NE assigned at $30.00) = -$333.75
= ($30.00-$30.464)*700 - $8.95 commissions

Total Net Profit (NE stock assigned at $30.00): +$432.55
= (+$503.80 +$262.50 -$333.75)

Absolute Return: +2.0%
= +$432.55/$21,333.75
Annualized Return: +41.1%
= (+$432.55/$21,333.75)*(365/18 days)

Established a 100% Cash-Secured Puts Position in Ensco PLC Class A

Today, the Covered Calls Advisor established a 100% Cash-Secured Puts position in Ensco PLC Class A (Ticker Symbol ESV) with a Jun2014 expiration and at the $50.00 strike price.  As detailed below, this investment will provide a +3.0% absolute return in 37 days (which is equivalent to a +29.4% annualized return) if Ensco's price is unchanged at $49.82 at options expiration on June 20th.  There will be an ex-dividend date in early June before options expiration of $.75, so the price of the stock will decline by that amount at the market open on the ex-div date.  Nevertheless, the Covered Calls Advisor would be pleased to purchase the shares at the $50 strike price since with a $3.00 current annual dividend, at $50 the associated dividend yield is a very attractive 6.0%. 

Details of this transaction along with a potential return-on-investment result are: 

Ensco PLC Class A (ESV)
The transaction is as follows:
05/16/2014 Sold 4 Jun2014 $50.00 Puts @ $1.70
Note: The price of Ensco was $49.82 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the four Put options sold.

A possible overall performance result (including commissions) for this Ensco transaction would be as follows:
100% Cash-Secured Cost Basis: $20,000.00 = $50.00*400
Note:  the price of Ensco was $49.82 when these Put options were sold.

Net Profit:
(a) Options Income: +$668.05
= ($1.70*400 shares) - $11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If ESV price remains unchanged at $49.82 at Jun2014 expiration): -$72.00
= ($49.82-$50.00)*400 shares

Total Net Profit (If ESV is unchanged at $49.82 at Jun2014 options expiration):+$596.05 
= (+$668.05 +$0.00 -$72.00)

Absolute Return (If ESV is $49.82 at Jun2014 options expiration and Put options thus expire worthless): +3.0%
= +$596.05/$20,000.00
Annualized Return (If ESV is at current price of $49.82 at expiration): +29.4%
= (+$596.05/$20,000.00)*(365/37 days)

Established Covered Calls Position -- Southwest Airlines Company

Today, a new covered calls position was established in Southwest Airlines Co.  (Ticker Symbol LUV).  This Southwest Airlines position was established at the $24.00 strike price and with a Jun2014 options expiration.

The details of the associated transactions and a potential return-on-investment result are as follows:

1. Southwest Airlines Co. (LUV)
The transactions were as follows:
05/07/2014 Bought 400 LUV shares @ $24.15
05/07/2014 Sold 4 LUV Jun2014 $24.00 Call Options @ $.85
Note: the price of LUV was $24.15 today when these options were sold.
06/03/2014 Ex-dividend of $.04 per share

A possible overall performance result (including commissions) for these Southwest Airlines covered calls is as follows:
Stock Purchase Cost: $9,668.95
= ($24.15*400+$8.95 commission)

Net Profit:
(a) Options Income: +$328.05
= 400*$.85 - $11.95 commissions
(b) Dividend Income: +$16.00 = $.04 per share * 400 shares
(c) Capital Appreciation (If LUV assigned at $24.00) = -$68.95
= ($24.00-$24.15)*400 - $8.95 commissions

Total Net Profit (If LUV assigned at $24.00): +$275.10
= (+$328.05 +$16.00 -$68.95)

Absolute Return if Assigned (at $24.00): +2.8%
= +$275.10/$9,668.95
Annualized Return If Assigned (ARIA): +22.6%
= (+$275.10/$9,668.95)*(365/46 days)