As shown below, this investment will provide a +3.0% absolute return in 34 days (which is equivalent to a +32.3% annualized return) if LVS stock closes above the $50.00 strike price on the April 17th options expiration date.
This potential return-on-investment result is attractive to us option sellers for a relatively conservative investment -- there is 3.0% downside protection (from the current $51.53 stock price to the $50.00 strike price). The implied volatility in the options was 27.8 when this position was established and there is no quarterly earnings report prior to April 17th.
LVS currently has casino locations in the U.S. in Las Vegas and Pennsylvania, and in Asia in China and Singapore. Despite the ongoing single-digit decline in overall revenues during the past 3 quarters (accompanied by a decline in the stock price), the future growth outlook is very positive given that many individuals have gambling addictions and many countries (and States in the U.S.) desperate to grow tax revenues are considering legalizing gambling. In addition, the quarterly dividend (LVS goes ex-div this week on Thursday) of $.65 provides downside protection to the stock price since the dividend yield would equal 5.2% if the stock declines to the $50.00 strike price.
The details of the associated transactions and a potential return-on-investment result are as follows:
1. Las Vegas Sands Corp. (LVS)
The transactions were as follows:
03/16/2015 Bought 200 LVS shares @ $51.53
03/16/2015 Sold 2 LVS Apr2015 $50.00 Call Options @ $2.53
Note: the price of LVS was $51.53 today when these options were sold.
A possible overall performance result (including commissions) for these Las Vegas Sands Corp. covered calls is as follows:
Stock Purchase Cost: $10,314.95
= ($51.53*200+$8.95 commission)
Net Profit:
(a) Options Income: +$495.55
= 200*$2.53 - $10.45 commissions
(b) Dividend Income: +$130.00 = $.65 x 200 shares (Note: ex-div date is 3/19/2015)
(c) Capital Appreciation (If LVS assigned at $50.00) = -$314.95
= ($50.00-$51.53)*200 - $8.95 commissions
Total Net Profit (If LVS assigned at $50.00): +$310.60
= (+$495.55 +$130.00 -$314.945)
Absolute Return if Assigned (at $50.00 strike price): +3.0%
= +$310.60/$10,314.95
Annualized Return If Assigned (ARIA): +32.3%
= (+$310.60/$10,314.95)*(365/34 days)
The downside 'breakeven price' at expiration is at $49.00 ($51.53 - $2.53), which is 4.9% below the current market price of $51.53.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Apr2015 options expiration) for this Las Vegas Sands covered calls position is 64.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of LVS over the same time period. Using this probability of profit of 64.8%, the Expected Value annualized ROI of this investment (if held until expiration) is +20.9% (+32.3% * 64.8%).
The 'crossover price' at expiration is $54.06 ($51.53 + $2.53). This is the price above which it would have been more profitable to simply buy-and-hold LVS stock until April 17th (the Apr2015 options expiration date) rather than establish this covered calls position.
