Covered Call Position in S&P 500 Index -- Closed

Today was the options expiration date for quarterly options.  The Covered Calls Advisor owned a covered call position in the S&P 500 Index (ticker symbol SPY) that was assigned (shares sold) at the $191.00 strike price since SPY closed at $191.63 today (i.e. above the strike price).

The maximum potential profit was realized which was +2.5% absolute return (equivalent to +33.6% annualized return for the 27 days of this covered call investment).  The details for this position are as follows:

1. S&P 500 Index (SPY) -- Covered Call Position Closed

The transactions were as follows:
09/04/2015 Bought 100 SPY shares @ $192.59
09/04/2015 Sold 1 SPY Sep30,2015 $191.00 Call option @ $5.53
09/18/2015 Ex-dividend of $1.03343 per share
09/30/2015 SPY Sep30,2015 Call option exercised and the 100 shares of SPY were sold at the $191.00 strike price.
Note: SPY closed at $191.63 on the 9/30/2015 quarterly options expiration date.

The overall performance result (including commissions) for this SPY covered call position was as follows:
Stock Purchase Cost: $19,267.95
= ($192.59*100+$8.95 commission)

Net Profit:
(a) Options Income: +$544.05
= ($5.53*100 shares) - $8.95 commissions
(b) Dividend Income (SPY assigned at Sept30,2015 expiration): +$103.34
= ($1.03343 dividend per share x 100 shares)

(c) Capital Appreciation (SPY assigned at $191.00 at Sept30,2015 expiration): -$167.95
= +($191.00-$192.59)*100 - $8.95 commissions

Total Net Profit (SPY assigned at $191.00 strike price at Sep30,2015 expiration): +$479.53

= (+$544.05 options income +$103.43 dividend income -$167.95 capital appreciation)
  

Absolute Return (SPY shares assigned at $191.00 at Sep30,2015 expiration): +2.5%

= +$479.53/$19,267.95

Annualized Return: +33.6%

= (+$479.53/$19,267.95)*(365/27 days)

Note: You might recall that the Implied Volatility (IV) of the SPY Call option when this position was established was 23.2 (above the Covered Calls Advisor's minimum threshold of 20.0). Looking ahead, the current IV for the Oct2015 $191.00 SPY Call options is at 21.2.  So, although the IV has declined somewhat, another covered calls position could be established with SPY (although the potential ROI would be somewhat lower) since the IV is still above the minimum threshold of 20.  The Covered Calls Advisor will decide tomorrow (or in the next few days) what to do with the cash obtained from selling these 100 SPY shares.  Any new position(s) will be posted on this blog site the same day it is established.  

Covered Calls Position Established in Potash Corp of Saskatchewan Inc.

Today, a new covered calls position was established in Potash Corp of Saskatchewan Inc. (ticker symbol POT) with an Oct2015 expiration.  The Potash stock was purchased at $20.31 and the Oct2015 Call options were simultaneously sold (i.e. a single buy-write transaction was made) at the $20.00 strike price for $.73 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Oct 8th) prior to the October 16th options expiration date.  Details of this position is provided below.

1. Potash Corp of Saskatchewan Inc. (POT)

A $.38 quarterly dividend goes ex-dividend on Oct 8th.  If the current time value (i.e. extrinsic value) of $.42 [$.73 option premium - ($20.31 stock price - $20.00 strike price)] remaining in the short call options decays substantially (from an increase in the price of Potash stock) by Oct 7th (the day prior to the ex-div date), then it is possible that the call option owner will exercise his/her option and will call the stock at the $20.00 strike price to capture the dividend.  

Either early assignment or assignment at the Oct2015 options expiration date (Oct 16th) would provide excellent return-on-investment results:

If Early Assignment: +1.6% absolute return (equivalent to +72.4% annualized return for the next 8 days) if the stock is assigned early (the business day prior to the Oct 8th ex-div date); OR

If Dividend Capture:  +3.5% absolute return (equivalent to +74.2% annualized return over the next 17 days) if the stock is assigned at Oct2015 expiration on October 16th.

The transactions are:
09/30/2015 Bought 200 POT shares @ $20.31
09/30/2015 Sold 2 POT Oct2015 $20.00 Call options @ $.73
10/08/2015 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this Potash Corp covered calls position are as follows:
Stock Purchase Cost: $4,070.95
= ($20.31*200+$8.95 commission)

Net Profit:
(a) Options Income: +$135.55
= ($.73*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Oct 8th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$76.00
= ($.38 dividend per share x 200 shares)

(c) Capital Appreciation [If stock assigned early on Oct 7th (business day prior to Oct 8th ex-div date)]: -$70.95
+($20.00-$20.31)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $20.00 at Oct2015 expiration): -$70.95
+($20.00-$20.31)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Oct 8th ex-div date): +$64.60

= (+$135.55 +$0.00 -$70.95); or

Total Net Profit (If stock assigned at $20.00 at Oct2015 expiration): +$140.60

= (+$135.55 +$76.00 -$70.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.6%

= +$64.60/$4,070.95

Annualized Return (If option exercised early): +72.4%

= (+$64.60/$4,070.95)*(365/8 days); or

2. Absolute Return (If stock assigned at $20.00 at Oct2015 expiration): +3.5%

= +$140.60/$4,070.95

Annualized Return (If stock assigned): +74.2%

= (+$140.60/$4,070.95)*(365/17 days)

Either outcome would provide an excellent return.  These returns will be achieved if the stock is above the $20.00 strike price at the Oct2015 options expiration.

Established Short 100% Cash-Secured Puts Position in Apple Inc

Today, the Covered Calls Advisor established a short position by selling two Apple Inc. (Symbol AAPL) Nov2015 $115.00 Put options.  This position expires after the Oct 20th earnings report, so the implied volatility of the options was 34 which is higher than would be the case if there was not an earnings release prior to expiration. 

As detailed below, this investment will yield a +4.7% absolute return in 54 days (which is equivalent to a +32.0% annualized return-on-investment) if Apple closes at the identical $113.54 price when this position was established today.  If it rises to close above the $115.00 strike price, a +6.0% absolute return (equivalent to a +40.5% annualized return-on-investment) will be achieved.
The details are provided below.

1. Apple Inc. (AAPL)
The transaction was as follows:
09/28/2015 Sold 2 Apple Inc. Nov2015 $115.00 Puts @ $6.95
Note: The price of AAPL was $113.54 when this transaction was executed

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

The purchase cost (including commissions) for this transaction was as follows:
100% Cash-Secured Cost Basis: $23,000.00
= $115.00*200
Note:  the price of AAPL was $113.54 when these Put options were sold.

Net Profit:
(a) Options Income: +$1,379.55
= ($6.95*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL closes unchanged at $113.54 at Nov 20th, 2015 expiration): -$292.00
= ($113.54 if price unchanged at expiration -$115.00 cash-secured cost basis)*200 shares; OR
(c) Capital Appreciation (If AAPL closes above $115.00 strike price at Nov 20th, 2015 expiration): +$0.00
= ($115.00 liquidation price if assigned -$115.00 cash-secured cost basis)*200 shares

1. Total Net Profit (If AAPL closes unchanged at $113.54 at Nov 20th, 2015 expiration): +$1,087.55
= (+$1,379.55 options income +$0.00 dividend income -$292.00 capital appreciation); OR
2. Total Net Profit (AAPL closed above $115.00 strike so the short options expire worthless): +$1,379.55
= (+$1,379.55 options income +$0.00 dividend income +$0.00 capital appreciation)

1. Absolute Return (If AAPL closes unchanged at $113.54 at Nov 20th, 2015 expiration): +4.7%
= +$1,087.55/$23,000.00
Annualized Return:  +32.0%
=  (+$1,087.55/$23,000.00)*(365/54 days); OR
2. Absolute Return (If AAPL closes above $115.00 strike price at Nov 20th, 2015 expiration): +6.0%
= +$1,379.55/$23,000.00
Annualized Return:  +40.5%
=  (+$1,379.55/$23,000.00)*(365/54 days)

Established New Positions -- Apple Inc., EMC Corporation, General Motors Co., Prudential Financial Inc., and United Continental Holdings Inc.

Today, the Covered Calls Advisor established new positions in Apple Inc. (ticker AAPL), EMC Corporation (EMC), General Motors Co. (GM), Prudential Financial Inc. (PRU), and United Continental Holdings Inc. (UAL) by selling Oct2015 options. All positions are somewhat conservative ones in that they have significant downside protection and none of the companies report their quarterly earnings prior to the options expiration date; but as detailed below, each investment also provides an attractive annualized return-on-investment potential. The first three positions listed above are Covered Calls and the last two are short 100% cash-secured Put options.

The potential returns are:
1. Apple Inc.: +1.9% absolute return in 25 days (which is equivalent to a +27.3% annualized return-on-investment) if AAPL closes above the $110.00 strike price on the Oct2015 options expiration date.  
2. EMC Corp: +1.8% absolute return in 25 days (equivalent to a +26.6% annualized return-on-investment)
3. General Motors Co.:  +2.0% absolute return in 25 days (equivalent to a +28.7% annualized return-on-investment)
4. Prudential Financial: +2.5% absolute return in 25 days (equivalent to a +36.9% annualized return-on-investment) 
5. United Continental: +2.2% absolute return in 25 days (equivalent to a +32.1% annualized return-on-investment)
Note: the Implied Volatility of the options at the time they were sold (for the five options above) ranged between 27 and 35.5, thus providing an attractive ROI return potential for each position.  

The transactions and potential return-on-investment results for each position are detailed below:

1.  Apple Inc. (AAPL) -- New Covered Calls Position
The transactions were as follows:
09/22/2015  Bought 200 Apple Inc. shares @ $113.58
09/22/2015 Sold 2 AAPL Oct2015 $110.00 Call options @ $5.80
Note: the price of AAPL was $113.71 today when this options transaction was executed.

A possible overall performance result (including commissions) would be as follows:
Bought 200 shares AAPL: $22,724.95
= $113.58*200 + $8.95 commission

Net Profit:
(a) Options Income: +$1,149.55
= ($5.80*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL is above $110.00 strike price at Oct2015 expiration): -$724.95
= ($110.00-$113.58)*200 shares - $8.95 commissions

Total Net Profit (If AAPL is above $110.00 strike price at Oct2015 options expiration): +$424.60
= (+$1,149.55 options income +$0.00 dividends -$724.95 capital appreciation)

Absolute Return (If AAPL is above $110.00 strike price at Oct2015 options expiration): +1.9%
= +$424.60/$22,724.95
Annualized Return: +27.3%
= (+$424.60/$22,724.95)*(365/25 days)

The downside 'breakeven price' at expiration is at $107.78 ($113.58 - $5.80), which is 5.1% below the current market price of $113.58.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Oct 16th, 2015 options expiration) for this Apple Inc. covered calls position is 66%. This compares with a probability of profit of 50.3% for a buy-and-hold of Apple Inc. stock over the same time period. Using this probability of profit of 66%, the Expected Value annualized ROI of this investment (if held until expiration) is +18.0% (+27.3% * 66%).


The 'crossover price' at expiration is $115.80 ($110.00 + $5.80).  This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until Oct 16th (the Oct2015 options expiration date) rather than establishing this covered calls position.


2.  EMC Corporation (EMC) -- New Covered Calls Position
A $.115 quarterly dividend goes ex-dividend on September 29th.  Although unlikely, if the current time value (i.e. extrinsic value) of $.37 [$1.08 option premium - ($23.71 stock price - $23.00 strike price)] remaining in the short call options decay substantially below the $.115 dividend amount by September 28th (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

The transactions were as follows:
09/22/2015  Bought 400 EMC Corp shares @ $23.71
09/22/2015 Sold 4 EMC Oct2015 $23.00 Call options @ $1.08
Note: the stock purchase and the sale of these call options was done as one simultaneous buy/write transaction.

Two possible overall performance results (including commissions) for this EMC Corp (EMC) covered calls position are as follows:
Stock Purchase Cost: $9,492.95
= ($23.71*400+$8.95 commission)

Net Profit:
(a) Options Income: +$420.05
= ($1.08*400 shares) - $11.95 commissions
(b) Dividend Income (If option exercised early on day prior to Sep 29th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$46.00
= ($.115 dividend per share x 400 shares); or

(c) Capital Appreciation (If stock assigned early on Sept 28th): -$292.95
+($23.00-$23.71)*400 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $23.00 at Oct2015 expiration): -$292.95
+($23.00-$23.71)*400 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Sept 29th ex-div date): +$127.10

= (+$420.05 options income +$0.00 dividend income -$292.95 capital appreciation); or

Total Net Profit (If stock assigned at $42.00 at Oct2015 expiration): +$173.10

= (+$420.05 options income +$46.00 dividend income -$292.95 capital appreciation)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.3%

= +$127.10/$9,492.95

Annualized Return (If option exercised early): +69.8%

= (+$127.10/$9,492.95)*(365/7 days); OR

2. Absolute Return (If EMC stock assigned at $23.00 at Oct2015 expiration): +1.8%

= +$173.10/$9,492.95

Annualized Return (If EMC stock assigned): +26.6%

= (+$173.10/$9,492.95)*(365/25 days)

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $23.00 strike price on the options expiration date.  Note: there is 3.0% of downside protection to the strike price with this position.  Alternatively, if the stock declines below the strike price, the breakeven price of $22.63 ($23.71 -$1.08) provides a nice 4.6% downside protection.


3.  General Motors Co. (GM) -- New Covered Calls Position
The transactions were as follows:

09/22/2015  Bought 300 General Motors Co. shares @ $29.67
09/22/2015 Sold 3 GM Oct2015 $29.00 Call options @ $1.32
Note: the stock purchase and the sale of these call options was done as one simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 300 shares GM: $8,909.95
= $29.67*300 + $8.95 commission

Net Profit:
(a) Options Income: +$384.80
= ($1.32*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GM is above $29.00 strike price at Oct2015 expiration): -$209.95
= ($29.00-$29.67)*300 shares - $8.95 commissions

Total Net Profit (If GM is above $29.00 strike price at Oct2015 options expiration): +$174.85
= (+$384.80 options income +$0.00 dividend income -$209.95 capital appreciation)

Absolute Return (If GM is above $29.00 strike price at Oct2015 options expiration): +2.0%
= +$174.85/$8,909.95
Annualized Return (If GM stock is above $29.00 at expiration): +28.7%
= (+$174.85/$8,909.95)*(365/25 days)

The downside 'breakeven price' at expiration is at $28.35 ($29.67-$1.32), which is 4.4% below the current market price of $29.67.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Oct 16th, 2015 options expiration) for this GM position is 59%. This compares with a probability of profit of 50.2% for a buy-and-hold of General Motors stock over the same time period. Using this probability of profit of 59%, the Expected Value annualized ROI of this investment (if held until expiration) is +16.9% (+28.7% * 59%).

The 'crossover price' at expiration is $24.32 ($23.00 + $1.32).  This is the price above which it would have been more profitable to simply buy-and-hold GM stock until October 16th (the Oct2015 options expiration date) rather than establishing this covered calls position.


4.  Prudential Financial Inc. (PRU) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
09/22/2015  Sold 2 PRU Oct2015 $75.00 100% cash-secured Put options @ $1.95
Note: the price of PRU was $75.60 today when this transaction was executed.

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

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $15,000.00
= $75.00*200
Note: the price of PRU was $75.60 when these options were sold

Net Profit:
(a) Options Income: +$379.55
= ($1.95*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PRU is above $75.00 strike price at Oct2015 expiration): +$0.00
= ($75.00-$75.00)*200 shares

Total Net Profit (If PRU is above $75.00 strike price at Oct2015 options expiration): +$379.55
= (+$379.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If PRU is above $75.00 strike price at Oct2015 options expiration): +2.5%
= +$379.55/$15,000.00
Annualized Return: +36.9%
= (+$379.55/$15,000.00)*(365/25 days)

The downside 'breakeven price' at expiration is at $73.05 ($75.00 - $1.95), which is 2.6% below the current market price of $75.60.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Oct 16th, 2015 options expiration) for this Prudential Financial short Puts position is 56%. This compares with a probability of profit of 50.3% for a buy-and-hold of Prudential stock over the same time period. Using this probability of profit of 56%, the Expected Value annualized ROI of this investment (if held until expiration) is +20.7% (+36.9% * 56).

The 'crossover price' at expiration is $77.55 ($75.60 + $1.95).  This is the price above which it would have been more profitable to simply buy-and-hold PRU until Oct 16th (the Oct2015 options expiration date) rather than selling these Put options.


5.  United Continental Holdings Inc. (UAL) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
09/22/2015  Sold 3 UAL Oct2015 $57.50 100% cash-secured Put options @ $1.30
Note: the price of UAL was $59.56 today when this transaction was executed.

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

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $17,250.00
= $57.50*300


Net Profit:
(a) Options Income: +$378.80
= ($1.30*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL is above $57.50 strike price at Oct2015 expiration): +$0.00
= ($57.50-$57.50)*300 shares

Total Net Profit (If UAL is above $57.50 strike price at Oct2015 options expiration): +$378.80
= (+$378.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If UAL is above $57.50 strike price at Oct2015 options expiration): +2.2%
= +$378.80/$17,250.00
Annualized Return: +32.1%
= (+$378.80/$17,250.00)*(365/25 days)

The downside 'breakeven price' at expiration is at $56.20 ($57.50 - $1.30), which is 2.2% below the current market price of $59.56.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Oct 16th, 2015 options expiration) for this UAL short Puts position is 67%. This compares with a probability of profit of 50.1% for a buy-and-hold of United Continental stock over the same time period. Using this probability of profit of 67%, the Expected Value annualized ROI of this investment (if held until expiration) is +21.5% (+32.1% * 67%).

The 'crossover price' at expiration is $60.86 ($59.56 + $1.30).  This is the price above which it would have been more profitable to simply buy-and-hold UAL until Oct 16th (the Oct2015 options expiration date) rather than selling these Put options.

Established Short 100% Cash-Secured Puts Position in Amgen Inc.

Today, the Covered Calls Advisor established a 100% cash-secured Puts position in Amgen Inc. (ticker AMGN) by selling 2 Oct2015 Put options at the $140.00 strike price. This position indicates that the Covered Calls Advisor is willing to purchase Amgen shares at $140.00 (for future covered calls investments) upon the market close on October 16th if the stock declines to below $140.00 at that time.  This is a conservative investment since AMGN stock was at $147.10 (4.8% above the strike price) when this position was established.

As detailed below, this investment will achieve a +1.8% absolute return in 26 days (which is equivalent to a +24.9% annualized return) if AMGN remains above $140.00 at the October 16th options expiration date. 
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Oct 16th, 2015 options expiration) for this Amgen Inc. short Puts position is 71.4%. This compares with a probability of profit of 50.2% for a buy-and-hold of Amgen stock over the same time period. Using this probability of profit of 71.4%, the Expected Value annualized ROI of this investment (if held until expiration) is +17.7% (+24.9% * 71.4%).

This transaction and an associated potential return-on-investment result is detailed below.

1.  Amgen Inc. (AMGN) -- New Position
The transaction was as follows:
09/21/2015 Sold 2 Amgen Inc. Oct2015 $140.00 Puts @ $2.54
Note: The price of AMGN was $147.10 when this transaction was executed.

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

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $28,000.00
= $140.00*200
Note:  the price of AMGN was $147.10 when the two Put options were sold.

Net Profit:
(a) Options Income: +$497.55
= ($2.54*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Amgen stock is above $140.00 strike price at Oct2015 expiration): +$0.00
= ($140.00-$140.00)*200 shares

Total Net Profit (If Amgen is above $140.00 strike price upon the Oct2015 options expiration): +$497.55
= (+$497.55 +$0.00 +$0.00)

Absolute Return: +1.8%
= +$497.55/$28,000.00
Annualized Return: +24.9%
= (+$497.55/$28,000.00)*(365/26 days)

The downside 'breakeven price' at expiration is at $137.46 ($140.00 - $2.54), which is 9.6% below the current market price. 
The 'crossover price' at expiration is $149.64 ($147.10 + $2.54).  This is the price above which it would have been more profitable to simply buy-and-hold Amgen Inc. shares until October 16th (the Oct2015 options expiration date) rather than selling these Put options.

Position Adjustments -- iShares China Large-Cap ETF, MetLife Inc., Micron Technology Inc., and International Paper

Upon last Friday's Sept2015 options expiration, four positions closed with their prices below the strike prices.  Today, covered call positions were established in the Covered Calls Advisor portfolio for three of these equities (iShares China Large-Cap ETF, MetLife Inc., and Micron Technology Inc.) for the Oct2015 options expiration. International Paper was the other company whose options expired last Friday, and these shares were sold today. The transactions to-date for these positions and associated return-on-investment results are detailed below:

1.  iShares China Large-Cap ETF (ticker FXI) --Continuation

The transactions are as follows:
08/17/2015 Sold 3 iShares China Large-Cap ETF Sep2015 $38.50 Puts @ $.77
Note: The price of FXI was $39.75 when this transaction was executed.
09/18/2015 3 FXI Sep2015 Put options exercised and 300 shares of FXI purchased at $38.50 strike price
Note: the price of FXI was $36.32 upon Sep2015 options expiration
09/21/2015 Sold 3 FXI $38.00 Oct2015 Call options @ $.73
Note: the price of FXI was $36.91 when this transaction was made

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

Two possible overall performance results (including commissions) for these transactions would be as follows:
100% Cash-Secured Cost Basis: $11,550.00
= $38.50*300


Net Profit:
(a) Options Income: +$427.60
= ($.77+$.73) *300 shares - 2*$11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI is unchanged at current $36.91 price upon Oct2015 expiration): -$477.00
= ($36.91-$38.50)*300 shares; or
(c) Capital Appreciation (If FXI is above $38.00 strike price at Oct2015 expiration): -$150.00
= ($38.00-$38.50)*300 shares

Total Net Profit (If FXI is unchanged at current price of $36.91 upon the Oct2015 options expiration): -$49.40
= (+$427.60 +$0.00 -$477.00); or
Total Net Profit (If FXI is above $38.00 strike price upon the Oct2015 options expiration): +$277.60
= (+$427.60 +$0.00 -$150.00)

1. Absolute Return (If FXI is unchanged at current price of $36.91 at Oct2015 options expiration): -0.4%
= -$49.40/$11,550.00
Annualized Return: -2.6%
= (+$219.80/$11,550.00)*(365/60 days); OR

2. Absolute Return (If FXI is above $38.00 strike price at Oct2015 options expiration): +2.4%
= +$277.60/$11,550.00
Annualized Return: +14.6%
= (+$277.60/$11,550.00)*(365/60 days)

2.  MetLife Inc. (ticker MET) --Continuation
The transaction was as follows:
08/31/2015 Sold 4 MetLife Inc. Sep2015 $48.00 Puts @ $.96
Note: The price of MET was $49.55 when this transaction was executed.
09/18/2015 4 MET Sep2015 Put options exercised and 400 shares of MET purchased at $48.00 strike price
Note: the price of MET was $46.52 upon Sep2015 options expiration
09/21/2015 Sold 4 MET $47.50 Oct2015 Call options @ $1.25
Note: the price of MET was $47.20 when this transaction was made


Two possible overall performance results (including commissions) for these transactions would be as follows:
100% Cash-Secured Cost Basis: $19,200.00
= $48.00*400

Net Profit:
(a) Options Income: +$860.10
= ($.96+$1.25) *400 shares - 2*$11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MET is unchanged at current $47.20 price upon Oct2015 expiration): -$320.00
= ($47.20 - $48.00)*400 shares; or
(c) Capital Appreciation (If MET is above $47.50 strike price at Oct2015 expiration): -$200.00
= ($47.50 - $48.00)*400 shares

Total Net Profit (If MET is unchanged at current price of $47.20 upon the Oct2015 options expiration): +$540.10
= (+$860.10 +$0.00 -$320.00); or
Total Net Profit (If MET is above $47.50 strike price upon the Oct2015 options expiration): +$660.10
= (+$860.10 +$0.00 -$200.00)

1. Absolute Return (If MET is unchanged at current price of $47.20 at Oct2015 options expiration): +2.8%
= +$540.10/$19,200.00
Annualized Return: +22.3%
= (+$540.10/$19,200.00)*(365/46 days); OR

2. Absolute Return (If MET is above $47.50 strike price at Oct2015 options expiration): +3.4%
= +$660.10/$19,200.00
Annualized Return: +27.3%
= (+$660.10/$19,200.00)*(365/46 days)

3.  Micron Technology Inc.  (ticker MU) --Continuation

The transaction was as follows:
08/12//2015  Sold 7 MU 100% cash-secured $17.00 Put options @ $.78
Note: The price of MU was $17.66 when this transaction was executed.
09/18/2015 7 MU Sep2015 Put options exercised and 700 shares of MU purchased at $17.00 strike price
Note: the price of MU was $15.50 upon Sep2015 options expiration
09/21/2015 Sold 7 MU $17.00 Oct2015 Call options @ $.55
Note: the price of MU was $15.80 when this transaction was made


Two possible overall performance results (including commissions) for these transactions would be as follows:
100% Cash-Secured Cost Basis: $11,900.00
= $17.00*700

Net Profit:
(a) Options Income: +$902.60
= ($.78+$.55) * 700 shares - 2*$14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MU is unchanged at current $15.80 price upon Oct2015 expiration): -$840.00
= ($15.80 - $17.00)*700 shares; or
(c) Capital Appreciation (If MU is above $17.00 strike price at Oct2015 expiration): +$0.00
= ($17.00 - $17.00)*700 shares

Total Net Profit (If MU is unchanged at current price of $15.80 upon the Oct2015 options expiration): +$62.60
= (+$902.60 +$0.00 -$840.00); or
Total Net Profit (If MU is above $17.00 strike price upon the Oct2015 options expiration): +$902.60
= (+$902.60 +$0.00 +$0.00)

1. Absolute Return (If MU is unchanged at current price of $15.80 at Oct2015 options expiration): +0.5%
= +$62.60/$11,900.00
Annualized Return: +3.0%
= (+$62.60/$11,900.00)*(365/65 days); OR

2. Absolute Return (If MU is above $17.00 strike price at Oct2015 options expiration): +7.6%
= +$902.60/$11,900.00
Annualized Return: +42.6%
= (+$902.60/$11,900.00)*(365/65 days)

4.  International Paper Inc. (ticker IP) -- Closed
The transactions were as follows:
08/03/2015 Bought 200 IP shares @ $47.30
08/03/2015 Sold 2 IP Aug2015 $46.00 Call options @ $1.59
08/12/2015 Ex-dividend of $.40 per share

08/21/2015 2 Aug2015 Call options expired
08/27/2015 Sold 2 IP Sep2015 $44.00 Call options @ $.92
09/18/2015 2 IP Sep2015 $44.00 Call options expired
Note: the price of IP was $40.42 upon Sep2015 options expiration
09/21/2015 Sold 200 IP shares @ $40.80

The performance result (including commissions) for this International Paper (IP) covered calls position is:
Stock Purchase Cost: $9,468.95
= ($47.30*200+$8.95 commission)

Net Profit:
(a) Options Income: +$481.10
= ($1.59 + $.92) *200 shares - 2*$10.45 commissions
(b) Dividend Income: +$80.00
= ($.40 dividend per share x 200 shares)
(c) Capital Appreciation: -$1,308.95

+($40.80 - $47.30)*200 - $8.95 commissions

Total Net Profit: -$747.85
= (+$481.10 +$80.00 -$1,308.95)

Absolute Return: -7.9%

= -$747.85/$9,468.95

Annualized Return: -39.0%

= (-$747.85/$9,468.95)*(365/74 days)

Department of Labor's Proposed Rule -- No Options in IRAs

Friends,

The U.S. Department of Labor (DOL) has issued a proposed rule that would eliminate the current ability of self-directed individual investors to use listed-options in our IRAs.

Clearly this is a misguided proposed rule change.  Many conservative investors (including us Covered Calls investors) depend on options as part of our income-oriented, risk-reducing investing approach.

Below is the email I have sent to DOL in opposition to this rule.  You too can voice your concern directly to the DOL, but must do so BEFORE SEPT 24, 2015, when the comment period ends. 

 
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Email To:  e-ORI@dol.gov
Subject: Objection to RIN1210-AB32



Department Of Labor:

I am an investor. My financial security, and that of my family, are very important to me – especially when I consider my retirement. Recently, I became aware of a proposed rule that would undermine my ability to plan for my retirement in a way I believe is best for me, and I want to share my concern with you.

My understanding is that the Department of Labor's (DOL's) proposed retirement rule would limit my ability to trade listed options in my IRA. It's a limitation that, to me, makes no sense and should not be pursued.

I am a conservative investor and invest in my IRAs using Covered Calls and 100% Cash-Secured Puts.  As you know, research has demonstrated that these strategies provide investment return results equal to or slightly better than for solely buying stocks (but with only two-thirds of the risk).  I am a self-directed investor.  Please do not restrict my freedom to continue investing in this manner – regardless of the type of brokerage account (retirement or non-retirement) that I hold.   

Please do not pursue this rule any further.  Its passage would likely have the following unintended consequences:  It would very likely drive me (and many investors) to trade options in non-retirement accounts, thereby decreasing the funding we have available for our retirement (from our IRAs). I'm sure that's not the DOL's intent, but it's a very real possibility.

So, I urge you to preserve the freedoms American investors currently enjoy to choose how we invest in our retirement accounts.

Sincerely,
Jeff Partlow

September 2015 Option Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained eight positions with September 2015 expirations.  The results are as follows:

- Four of the eight positions (Dow Chemical Co., General Motors Co., JPMorgan Chase and Co., and United Continental Holdings Inc.) were closed out at expiration. This was the optimal result for these positions in that the maximum potential return-on-investment (ROI) results were achieved for these positions.  The annualized ROI for these closed positions are:

• Dow Chemical Co. = +1.9% absolute return (equivalent to +19.1% annualized return for the 37 days holding period)
• General Motors Co. = +2.6% absolute return (equivalent to +24.6% annualized return for the 39 days holding period)
• JPMorgan Chase and Co. = +1.7% absolute return (equivalent to +35.3% annualized return for the 18 days holding period)
• United Continental Holdings Inc. = +3.6% absolute return (equivalent to +30.6% annualized return for the 43 days holding period)

The detailed transactions history and results for each of these positions is detailed below. The cash available from the closing of these positions will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.

- Four of the eight positions (International Paper Co., iShares China Large-Cap ETF, MetLife Inc., and Micron Technology Inc.) ended at expiration with the price of the stocks below the strike prices, so the respective options expired and the long shares are now retained in the Covered Calls Advisor Portfolio.  A decision will be made soon to either sell these shares or to establish a covered calls position by selling future 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 along with the detailed transactions to-date for each position.

Details of the four closed positions summarized above and the associated return-on-investment results are as follows:

1. Dow Chemical Co. (DOW) -- Closed
The transactions were as follows:
08/13//2015  Sold 3 DOW Sep2015 $43.00 100% cash-secured Put options @ $.87
Note: The price of DOW was $45.25 when this transaction was executed.
09/18/2015 3 DOW Sep2015 $43.00 Put options expired
Note: The price of DOW was $43.31 upon Sep2015 options expiration

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

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $12,908.95
= $43.00*300 + $8.95

Net Profit:
(a) Options Income: +$249.80
= ($.87*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: (DOW stock was above $43.00 strike price at Sep2015 expiration): +$0.00
= ($43.00-$43.00)*300 shares

Total Net Profit: +$249.80
= (+$249.80 +$0.00 +$0.00)

Absolute Return: +1.9%
= +$249.80/$12,908.95
Annualized Return: +19.1%
= (+$249.80/$12,908.95)*(365/37 days)


2. General Motors Co. (GM) -- Closed
The transactions were as follows:
08/11/2015 Bought 300 GM shares @ $30.93
08/11/2015 Sold 3 GM Sep2015 $30.00 Call options @ $1.45
09/10/2015 Ex-dividend of $.36 per share
09/18/2015 300 GM shares sold at $30.00 strike price
Note: The price of GM stock was $30.51 upon Sep2015 options expiration

The performance result (including commissions) for this General Motors (GM) covered calls position was as follows:
Stock Purchase Cost: $9,287.95
= ($30.93*300+$8.95 commission)

Net Profit:
(a) Options Income: +$423.80
= ($1.45*300 shares) - $11.20 commissions

(b) Dividend Income (GM stock assigned at Sep2015 expiration): +$108.00
= ($.36 dividend per share x 300 shares)

(c) Capital Appreciation: -$287.95
+($30.00-$30.93)*300 - $8.95 commissions

Total Net Profit (GM stock assigned at $30.00 at Sep2015 options expiration): +$243.85

= (+$423.80 +$108.00 -$287.95)

Absolute Return: +2.6%

= +$243.85/$9,287.95

Annualized Return: +24.6%

= (+$243.85/$9,287.95)*(365/39 days)

3. JPMorgan Chase and Co. (JPM) -- Closed
The transactions were as follows:
09/01//2015  Sold 3 JPM 100% cash-secured $60.50 Put options @ $1.09
Note: The price of JPM was $62.54 when this transaction was executed.
09/18/2015  3 JPM Sep2015 $60.50 Put options expired
Note: The price of JPM was $60.94 upon Sep2015 options expiration

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $18,158.95
= $60.50*300 + $8.95

Net Profit:
(a) Options Income: +$315.80
= ($1.09*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (JPM stock was above $60.50 strike price at Sep2015 expiration): +$0.00
= ($60.50-$60.50)*300 shares

Total Net Profit (JPM stock was above $60.50 strike price at Sep2015 options expiration): +$315.80
= (+$315.80 +$0.00 +$0.00)

Absolute Return: +1.7%
= +$315.80/$18,158.95
Annualized Return: +35.3%
= (+$315.80/$18,158.95)*(365/18 days)


4. United Continental Holdings Inc. (UAL) -- Closed
The transactions were as follows:
08/07/2015  Sold 3 UAL 100% cash-secured $55.00 Put options @ $2.02
Note: The price of UAL was $56.84 when this transaction was executed.
09/18/2015  3 UAL Sep2015 $55.00 Put options expired
Note: The price of UAL was $60.31 upon Sep2015 options expiration

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $16,500.00
= $55.00*300

Net Profit:
(a) Options Income: +$594.80
= ($2.02*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (UAL stock was above $55.00 strike price at Sep2015 expiration): +$0.00
= ($55.00-$55.00)*300 shares

Total Net Profit: +$594.80
= (+$594.80 +$0.00 +$0.00)

Absolute Return: +3.6%
= +$594.80/$16,500.00
Annualized Return: +30.6%
= (+$594.80/$16,500.00)*(365/43 days)

Established Two New Covered Calls Positions -- Examples of Strategy to Achieve Either Early Assignment or Dividend Capture

Today, two new covered call positions were established in Dow Chemical Co. (ticker symbol DOW) and JPMorgan Chase and Co. (ticker symbol JPM) with Oct2015 expirations.  The DOW stock was purchased at $43.29 and the Call options were sold at the $42.00 strike price.  The JPM stock was purchased at $60.93 and the Call options were sold at the $60.00 strike price.

Both of these covered calls investments are strategic ones that explicitly consider the upcoming quarterly dividends with ex-dividend dates prior to the October 16th options expiration date.  Details of each covered calls position is provided below.

1. Dow Chemical Co. (DOW)

A $.42 quarterly dividend goes ex-dividend on September 28th.  Although unlikely, if the current time value (i.e. extrinsic value) of $.75 [$2.04 option premium - ($43.29 stock price - $42.00 strike price)] remaining in the short call options decay substantially below the $.42 dividend amount by September 27th (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +1.5% absolute return (equivalent to +55.6% annualized return for the next 10 days) if the stock is assigned early (day prior to Sept 28th ex-div date); OR

If Dividend Capture:  +2.5% absolute return (equivalent to +31.2% annualized return over the next 29 days) if the stock is assigned at Oct2015 expiration on October 16th.

09/18/2015 Bought 200 DOW shares @ $43.29
09/18/2015 Sold 2 DOW Oct2015 $42.00 Call options @ $2.04

09/28/2015 Upcoming ex-dividend of $.42 per share

Two possible overall performance results (including commissions) for this Dow Chemical Co. (DOW) covered calls position are as follows:
Stock Purchase Cost: $8,666.95
= ($43.29*200+$8.95 commission)

Net Profit:
(a) Options Income: +$397.55
= ($2.04*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Oct 28th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$84.00
= ($.42 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Sept 27th): -$266.95
+($42.00-$43.29)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $42.00 at Oct2015 expiration): -$266.95
+($42.00-$43.29)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Sept 28th ex-div date): +$130.60

= (+$397.55 +$0.00 -$266.95); or

Total Net Profit (If stock assigned at $42.00 at Oct2015 expiration): +$214.60

= (+$397.55 +$84.00 -$266.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.5%

= +$130.60/$8,666.95

Annualized Return (If option exercised early): +55.0%

= (+$130.60/$8,666.95)*(365/10 days); OR

2. Absolute Return (If stock assigned at $42.00 at Oct2015 expiration): +2.5%

= +$214.60/$8,666.95

Annualized Return (If stock assigned): +31.2%

= (+$214.60/$8,666.95)*(365/29 days)

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $42.00 strike price at assignment, with 2.0% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $41.25 ($43.29 -$2.04) provides a nice 3.8% downside protection. 


2. JPMorgan Chase Co. (JPM)

A $.44 quarterly dividend goes ex-dividend on October 2nd.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.30 [$2.23 option premium - ($60.93 stock price - $60.00 strike price)] remaining in the short call options decay substantially below the $.44 dividend amount by October 1st (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +2.0% absolute return (equivalent to +51.4% annualized return for the next 14 days) if the stock is assigned early (day prior to Oct 2nd ex-div date); OR

If Dividend Capture:  +2.7% absolute return (equivalent to +33.9% annualized return over the next 29 days) if the stock is assigned at Oct2015 expiration on October 16th.

09/18/2015 Bought 200 JPM shares @ $60.93
09/18/2015 Sold 2 JPM Oct2015 $60.00 Call options @ $2.23
10/02/2015 Upcoming ex-dividend of $.44 per share

Two possible overall performance results (including commissions) for this JPMorgan Chase Co. (JPM) covered calls position are as follows:
Stock Purchase Cost: $12,194.95
= ($60.93*200+$8.95 commission)

Net Profit:
(a) Options Income: +$435.55
= ($2.23*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Oct 2nd ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$88.00
= ($.44 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Sept 30th): -$194.95
+($60.00-$60.93)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $60.00 at Oct2015 expiration): -$194.95
+($60.00-$60.93)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Oct 2nd ex-div date): +$240.60

= (+$435.55 +$0.00 -$194.95); or

Total Net Profit (If stock assigned at $60.00 at Oct2015 expiration): +$328.60

= (+$435.55 +$88.00 -$194.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +2.0%

= +$240.60/$12,194.95

Annualized Return (If option exercised early): +51.4%

= (+$240.60/$12,194.95)*(365/14 days); OR

2. Absolute Return (If stock assigned at $60.00 at Oct2015 expiration): +2.7%

= +$328.60/$12,194.95

Annualized Return (If stock assigned): +33.9%

= (+$328.60/$12,194.95)*(365/29 days)

As was true with the DOW position, early assignment in this JPM position would also provide a higher annualized return if the Call options are exercised early.  So, this would be the Covered Calls Advisor's preferred outcome; but either outcome provides an attractive return result.  These returns will be achieved as long as the stock is above the $60.00 strike price at assignment, with 0.8% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $58.70 ($60.93 - $2.23) provides 3.0% of downside protection. 

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In summary, these are both relatively conservative covered calls investments that provide nice annualized ROI potential if they are exercised [either early (on day prior to ex-div date) or upon the options expiration date].