Established Covered Calls Position in General Motors Co.

Today, a new covered calls position was established in General Motors Co. (ticker symbol GM).  Three hundred shares of GM were purchased at $34.31 and three in-the-money Jan2016 Call options were sold at the $33.00 strike price for $1.66 each.
As shown below, this investment will provide a +0.8% absolute return in 19 days (which is equivalent to a +16.2% annualized return) if GM stock remains above the $33.00 strike price on the January 15th options expiration date.

This potential return-on-investment result is attractive to us option sellers given this conservative investment -- there is 3.8% downside protection (from the current $34.31 stock price to the $33.00 strike price).  The implied volatility in the options was approximately 28 when this position was established and there are no quarterly earnings or ex-dividends prior to the expiration date at the end of next week. 

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

1.  General Motors Co. (GM) -- New Covered Calls Position The transactions were as follows:
12/28/2015  Bought 300 General Motors Co. shares @ $34.31
12/28/2015 Sold 3 GM Jan2016 $33.00 Call options @ $1.66
Note: the stock purchase and the sale of these call options was done as a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 300 shares GM: $10,300.95
= $34.31*300 + $7.95 commission

Net Profit:
(a) Options Income: +$487.80
= ($1.66*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GM is above $33.00 strike price at Jan2016 expiration): -$400.95
= ($33.00-$34.31)*300 shares - $7.95 commissions

Total Net Profit (If GM is above $33.00 strike price at Jan2016 options expiration): +$86.85
= (+$487.80 options income +$0.00 dividend income -$400.95 capital appreciation)

Absolute Return (If GM is above $33.00 strike price at Jan2016 options expiration): +0.8%
= +$86.85/$10,300.95
Annualized Return (If GM stock is above $33.00 at expiration): +16.2%
= (+$86.85/$10,300.95)*(365/19 days)

The downside 'breakeven price' at expiration is at $32.65 ($34.31 -$1.66), which is 5.1% below the current market price of $34.31.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this GM position is 72%. 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 72%, the Expected Value annualized ROI of this investment (if held until expiration) is +11.7% (+16.2% * 72%).

The 'crossover price' at expiration is $35.97 ($34.31 + $1.66).  This is the price above which it would have been more profitable to simply buy-and-hold GM stock until January 15th (the Jan2016 options expiration date) rather than establishing this covered calls position.

Established New Position in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor established a new position in Alibaba Group Holding Ltd. (ticker symbol BABA) by selling two Nov2016 Put options at the $90.00 strike price. This position is a conservative one since it was established when the price of Alibaba was $92.74 (3.0% downside protection to the strike price) and exactly one week remaining until the options expiration date.

As detailed below, the Alibaba Group Holding Ltd. investment will yield a +0.8% absolute return in 8 days (which is equivalent to a +36.6% annualized return-on-investment) if Alibaba stock closes above the $90.00 strike price on the Nov 18th options expiration date. 

Today was Alibaba's annual Singles Day, and they transacted an incredible $17.73 billion (yes that's Billion -- with a B), an increase of 24% above the same day last year. 

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

The implied volatility in the options was 35 when this position was established; so the $.77 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1. Alibaba Group Holding Ltd (BABA) --
The transaction was as follows:
11/11/2016  Sold 2 BABA 100% cash-secured $90.00 Put options with Nov2016 expirations @ $.77
Note: the price of Alibaba was $92.74 today when this transaction was executed.

A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $18,000.00
= $90.00*200

Net Profit:
(a) Options Income: +$144.55
= ($.77 * 200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA closes above $90.00 strike price at Nov2016 expiration): +$0.00
= ($90.00 -$90.00)*200 shares

Total Net Profit: +$144.55
= (+$144.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +0.8%
= +$144.55/$18,000.00
Annualized Return: +36.6%
= (+$144.55/$18,000.00)*(365/8 days)

The downside 'breakeven price' at expiration is at $78.92 ($80.00 - $1.08), which is 6.0% below the current market price of $83.92.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this Alibaba short Puts position is 74%. This compares with a probability of profit of 50.3% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 74%, the expected value annualized return-on-investment (if held until expiration) is +15.2% (+20.5% * 74%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $85.00 ($83.92 + $1.08).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Jan2016 options expiration date rather than selling these Put options.

Continuation of Cal-Maine Foods Inc. Position

At the Dec2015 options expiration last Friday, the four Put options in Cal-Maine Foods Inc.(ticker symbol CALM) were assigned and 400 shares of Cal-Maine stock were purchased at the $50.00 strike price. Quarterly earnings were released after the market close yesterday and after an initial hit to the stock, the stock price recovered to above the $50 level.  At that point today, the Covered Calls Advisor established a covered calls position by selling four Jan2016 Call options against the 400 Cal-Maine shares held. The company also declared a quarterly dividend of $.751 which will go ex-dividend on Jan 25th (after the Jan2016 options expiration on Jan 15th). It is likely that the Covered Calls Advisor will roll the Jan2016 covered calls into a Feb2016 covered calls position to enable a potential dividend capture.

A potential return-on-investment is +7.2% absolute return (equivalent to +57.1% annualized) for the 46 days of this Cal-Maine investment. Details of these Cal-Maine transactions to-date and a potential return-on-investment result are provided below:


1. Cal-Maine Foods Inc. (CALM) -- Continuation

The transaction was as follows:
12/01/2015  Sold 4 CALM Dec2015 $50.00 100% cash-secured Put options @ $1.20
Note: the price of CALM was $52.10 today when this transaction was executed.
12/18/2015 4 CALM Dec2015 Puts assigned and 400 shares of Cal-Maine stock purchased at $50.00 strike price
Note: the price of CALM was $47.52 upon the Dec2015 options expiration
12/24/2015 Established a covered calls position by selling 4 Jan2016 $50.00 Call options @ $2.45
Note: the price of CALM was $50.84 when these Call options were sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $50.00*400

Net Profit:
(a) Options Income: +$1,438.10
= ($1.20 +$2.45)*400 shares - 2*$10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CALM is above $50.00 strike price at Jan2016 expiration): +$0.00
= ($50.00-$50.00)*400 shares

Total Net Profit (If CALM is above $50.00 strike price at Jan2016 options expiration): +$1,438.10
= (+$1,438.10 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If CALM is above $50.00 strike price at Jan2016 options expiration): +7.2%
= +$1,438.10/$20,000.00
Annualized Return: +57.1%
= (+$469.05/$20,000.00)*(365/46 days)

Closed Four Positions -- Avis Budget Group, Kinder Morgan, MetLife Inc., and Paccar Inc.

Today, three positions (Avis Budget Group Inc., MetLife Inc., and Kinder Morgan Inc.) were closed as follows:

1. Avis Budget Group Inc. (CAR) -- Closed
The transaction was as follows:

11/24/2015  Sold 3 CAR Dec2015 $37.50 100% cash-secured Put options @ $1.00
Note: the price of CAR was $38.95 today when this transaction was executed.
12/18/2015 Bought 300 CAR shares at $37.50 strike price
12/23/2015 Sold 300 CAR shares @ $36.50

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $11,250.00
= $37.50*300

Net Profit:
(a) Options Income: +$288.80
= ($1.00*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$294.00
= ($36.52 -$37.50)*300 shares

Total Net Profit: -$5.20
= (+$288.80 options income +$0.00 dividend income -$294.00 capital appreciation)

Absolute Return: -0.05%
= -$5.20/$11,250.00
Annualized Return: -0.6%
= (-$5.20/$11,250.00)*(365/29 days)


2. Kinder Morgan Inc. (KMI) -- Closed
The transactions were as follows:
11/27/2015 Bought 300 Kinder Morgan shares @ $23.95
11/27/2015 Sold 3 KMI Dec2015 $22.50 Call Options @ $1.80
12/18/2015 3 KMI Call options expired since price was below strike price at Dec2015 expiration
12/23/2015 Sold 300 KMI shares @ $16.30

The overall performance result (including commissions) was as follows:
Stock Purchase Cost: $7,192.95
= ($23.95*300+$7.95 commission)

Net Profit:
(a) Options Income: +$529.80
= 300*$1.80 - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation = -$2,302.95
= ($16.30 -$23.95)*300 - $7.95 commissions

Total Net Profit: -$1,773.15
= (+$529.80 +$0.00 -$2,302.95)

Absolute Return: -24.7%
= -$1,773.15/$7,192.95


3. MetLife Inc. (MET) -- Closed
The transactions were as follows:
12/09/2015 Bought 300 MetLife Inc. @ $48.43
12/09/2015 Sold 3 MET Dec2015 $47.50 Call Options @ $1.51
12/18/2015 Bought 300 MET shares at $47.50 strike price
12/23/2015 Sold 300 MET shares @ $47.653


The overall performance result (including commissions) was as follows:
Stock Purchase Cost: $14,536.95
= ($48.43*300+$7.95 commission)

Net Profit:
(a) Options Income: +$442.80
= 300*$1.51 - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation = -$241.05
= ($47.653-$48.43)*300 - $7.95 commissions

Total Net Profit: +$201.75
= (+$442.80 +$0.00 -$241.05)

Absolute Return: +1.4%
= +$201.75/$14,536.95
Annualized Return If Assigned (ARIA): +33.8%
= (+$201.75/$14,536.95)*(365/15 days)


4. Paccar Inc. (PCAR) -- Closed

The transactions were:
12/10/2015 Bought 200 PCAR shares @ $48.97
12/10/2015 Sold 2 PCAR Jan2016 $45.00 Call options @ $4.47
Note: a simultaneous buy/write transaction was executed.
12/16/2015 Special dividend of $1.40 per share.  Strike price adjusted to $43.60.
12/23/2015 Unwound covered calls position by simultaneous selling of 200 shares of PCAR @ $48.11 and buy-to-close of two short Call options @ $4.76.

The overall performance result (including commissions) for this PCAR covered calls position was as follows:
Stock Purchase Cost: $9,801.95
= ($48.97*200+$7.95 commission)

Net Profit:
(a) Options Income: -$68.95
= ($4.47-$4.76)*200 shares) - $9.45 - $1.50 commissions

(b) Dividend Income: +$280.00
= ($1.40 special dividend per share x 200 shares)

(c) Capital Appreciation: -$179.95
+($48.11-$48.97)*200 - $7.95 commissions

Total Net Profit: +$31.10

= (-$68.95 +$280.00 -$179.95)

Absolute Return: +0.3%

= +$31.10/$9,801.95

Annualized Return: +8.9%

= (+$31.10/$9,801.95)*(365/13 days)

Continuation of Devon Energy Corp, Goldman Sachs Inc., and Polaris Industries Inc. Covered Calls Positions

At the Dec2015 options expiration last Friday, the options in Devon Energy Corp, Goldman Sachs Inc., and Polaris Industries Inc. closed below their strike prices, so the options expired worthless in the Covered Calls Advisor Portfolio.  Today, ongoing covered calls were established for these three holdings as follows:

1. Devon Energy Corp. (DVN) -- Continuation of Covered Calls Position

11/19/2015 Bought 200 DVN shares @ $45.325
11/19/2015 Sold 2 DVN Dec2015 $42.50 Call options @ $4.05
12/11/2015 Ex-dividend of $.24 per share
12/18/2015 2 DVN Call options expired
12/23/2015 Sold 2 DVN Dec 31, 2015 Call options @ $1.14
Note: the price of DVN was $32.20 when these Calls were sold.

A possible overall performance result (including commissions) for this Devon covered calls position are as follows:
Stock Purchase Cost: $9,073.95
= ($45.325*200+$8.95 commission)

Net Profit:
(a) Options Income: +$1,017.10
= ($4.05 +$1.14)*200 shares - 2*$10.45 commissions

(b) Dividend Income: +$48.00
= ($.24 dividend per share x 200 shares)

(c) Capital Appreciation (If stock assigned at $32.00 at Dec 31, 2015 expiration): -$4,005.45
+($32.00-$45.325)*200 - $7.95 commissions

Total Net Profit (If stock assigned at $32.00 at Dec 31, 2015 expiration): -$2,940.35

= (+$1,017.10 +$48.00 -$4,005.45)

Absolute Return (If stock assigned at $32.00 at Dec 31, 2015 expiration): -32.4%

= -$2,940.35/$9,073.95

2. Goldman Sachs Group Inc. (GS) -- Continuation of Covered Call Position

11/24/2015 Bought 100 GS shares @ $187.06
11/24/2015 Sold 1 GS Dec2015 $180.00 Call option @ $8.75
Note: the price of GS was $187.21 when the option was sold
11/30/2015 Ex-dividend of $.65 per share
12/18/2015 1 Goldman Sachs Dec2015 $180.00 Call option expired
12/23/2015 Sold 1 GS Jan2016 Call option @ $4.95
Note: the price of GS was $181.25 when this Call option was sold.


A possible overall performance result (including commissions) for this Goldman Sachs covered call position is as follows:
Stock Purchase Cost: $18,713.95
= ($187.06*100+$7.95 commission)

Net Profit:
(a) Options Income: +$1,350.60
= ($8.75 +$4.95)*100 shares) - 2*$9.70 commissions

(b) Dividend Income: +$65.00
= ($.65 dividend per share x 100 shares)

(c) Capital Appreciation (If stock assigned at $180.00 at Jan2016 expiration): -$713.95
+($180.00-$187.06)*100 - $7.95 commissions

Total Net Profit (If stock assigned at $180.00 at Jan2016 expiration): +$701.65

= (+$1,350.60 +$65.00 -$713.95)

Absolute Return (If stock assigned at $180.00 at Jan2016 expiration): +3.7%

= +$701.65/$18,714.95

3. Polaris Industries Inc. (PII) -- Continuation of Covered Call Position

11/24/2015 Bought 100 PII shares @ $103.92
11/24/2015 Sold 1 PII Dec2015 $100.00 Call option @ $5.32
11/27/2015 Ex-dividend of $.53 per share
12/18/2015 1 Polaris Dec2015 $100.00 Call option expired
12/23/2015 Sold 1 PII Jan2016 Call option @ $1.50
Note: the price of PII was $86.20 when this Call option was sold.

A possible overall performance result (including commissions) for this Polaris covered call position is as follows:
Stock Purchase Cost: $10,400.95
= ($103.92*100+$8.95 commission)

Net Profit:
(a) Options Income: +$662.60
= ($5.32 +$1.50) *100 shares) - 2*$9.70 commissions
(b) Dividend Income: +$53.00
= ($.53 dividend per share x 100 shares)

(c) Capital Appreciation (If stock assigned at $90.00 strike price at Jan2016 expiration): -$1,399.95
+($90.00-$103.92)*100 - $8.95 commissions

Total Net Profit (If stock assigned at $90.00 at Jan2016 expiration): -$684.35

= (+$662.60 +$53.00 -$1,399.95)

Absolute Return (If stock assigned at $90.00 at Jan2016 expiration): -6.6%

= -$684.35/$10,400.95

Established New Position in The Walt Disney Company

Today, the Covered Calls Advisor established a new position in The Walt Disney Company (ticker symbol DIS) by selling two Jan2016 Put options at the $102.00 strike price. This position is a conservative one since it was established with 3.6% downside protection to the strike price.

As detailed below, The Walt Disney Company investment will yield a +1.7% absolute return in 26 days (which is equivalent to a +24.5% annualized return-on-investment) if Disney stock closes above the $102.00 strike price on the Jan 15th options expiration date. 

This potential return is very nice given the downside protection (from the $105.86 stock price to the $102.00 strike price) when the position was established.  The implied volatility in the options was 31 when this position was established; so the $1.83 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1. The Walt Disney Company (DIS) -- New 100% Cash-Secured Puts Position
12/21/2015  Sold 2 DIS Jan2016 $102.00 100% cash-secured Put options @ $1.83
Note: the price of DIS was $105.86 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: $20,400.00
= $102.00*200
Note: the price of Disney was $105.86 when these options were sold

Net Profit:
(a) Options Income: +$356.55
= ($1.83*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DIS is above $102.00 strike price at the Jan2016 expiration): +$0.00
= ($102.00-$102.00)*200 shares

Total Net Profit (If Disney stock is above $102.00 strike price at Jan2016 options expiration): +$356.55
= (+$356.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Disney is above $102.00 strike price at Jan2016 options expiration): +1.7%
= +$356.55/$20,400.00
Annualized Return: +24.5%
= (+$356.55/$20,400.00)*(365/26 days)

The downside 'breakeven price' at expiration is at $100.17 ($102.00 - $1.83), which is 5.2% below the current market price of $105.68.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this Disney short Puts position is 70%. This compares with a probability of profit of 50.2% for a buy-and-hold of The Walt Disney Company stock over the same time period. Using this probability of profit of 70%, the expected value annualized return-on-investment (if held until expiration) is +17.2% (+24.5% * 70%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $107.51 ($105.68 + $1.83).  This is the price above which it would have been more profitable to simply buy-and-hold Disney stock until the Jan2016 options expiration date rather than selling these Put options.

December 2015 Option Expiration Results

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

- Four of the eleven positions (Alibaba Group Holding Ltd., AmTrust Financial Services Inc., Enterprise Products Partners LP, and Nationstar Mortgage Holdings Inc.) were closed out at expiration. This was the optimal outcome for these positions in that the maximum potential return-on-investment (ROI) results were achieved:

• Alibaba Group Holding Ltd. = +5.0% absolute return (equivalent to +49.5% annualized return for the 37 days holding period)
• AmTrust Financial Services Inc. = +1.0% absolute return (equivalent to +23.4% annualized return for the 16 days holding period)
• Enterprise Products Partners LP = +3.2% absolute return (equivalent to +96.5% annualized return for the 12 days holding period)
• Nationstar Mortgage Holdings Inc. = +3.1% absolute return (equivalent to +45.3% annualized return for the 25 days holding period)

The 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.  Any new positions will be posted on this site on the same day they occur.

- Seven of the eleven positions (Avis Budget Group Inc., Cal-Maine Foods Inc., Devon Energy Corp, Goldman Sachs Group Inc., MetLife Inc., Kinder Morgan Inc., and Polaris Industries Inc.) ended at expiration with the price of the stock below the strike price, so the options expired and the long shares are now retained in the Covered Calls Advisor Portfolio.   Decisions will be made soon to either sell these shares or to establish covered calls positions by selling future Call options against the current long stock holdings. When these decisions are made and the accompanying transactions completed, posts to this blog will be made on the same day they occur along with the detailed transactions to-date.

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

1. Alibaba Group Holding Ltd (BABA) -- Position Closed
The transactions were as follows:
11/12/2015  Sold 2 BABA 100% cash-secured $80.00 Put options @ $2.16
Note: the price of Alibaba was $78.90 today when this transaction was executed. The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the two Put options sold.
11/20/2015 Bought 200 shares BABA @ $80.00 strike price
Note: the price of BABA was $79.95 upon Nov2015 options expiration
11/23/2015 Established covered calls position by selling two BABA Dec2015 $77.50 Call options @ $4.45
12/18/2015 200 BABA shares sold at $77.50 strike price
Note: BABA shares closed at $82.65 at 12/18/2015 options expiration.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $16,000.00
= $80.00*200

Net Profit:
(a) Options Income: +$1,303.10
= ($2.16+$4.45) * 200 shares - $9.45*2 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA was above $77.50 strike price at Dec2015 expiration): -$500.00
= ($77.50 -$80.00)*200 shares

Total Net Profit: +$803.10
= (+$1,303.10 options income +$0.00 dividend income -$500.00 capital appreciation)

Absolute Return: +5.0%
= +$803.10/$16,000.00
Annualized Return: +49.5%
= (+$803.10/$16,000.00)*(365/37 days)


2. AmTrust Financial Services Inc.(AFSI) -- Postion Closed

The transactions were as follows:
12/03/2015  Sold 3 AFSI Dec2015 $60.00 100% cash-secured Put options @ $.65
Note: the price of AFSI was $62.55 today when this transaction was executed.
12/18/2015 3 AFSI Put options expired
Note: AFSI shares closed at $60.54 at 12/18/2015 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: $18,000.00
= $60.00*300

Net Profit:
(a) Options Income: +$184.80
= ($.65*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (AFSI closed above $60.00 strike price at Dec2015 expiration): +$0.00
= ($60.00-$60.00)*300 shares

Total Net Profit (AFSI closed above $60.00 strike price at Dec2015 options expiration): +$184.80
= (+$184.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.0%
= +$184.80/$18,000.00
Annualized Return: +23.4%
= (+$184.80/$18,000.00)*(365/16 days)


3. Enterprise Products Partners (EPD) -- Position Closed

The transactions were as follows:
12/07/2015  Sold 3 EPD Dec2015 $21.00 100% cash-secured Put options @ $.70
Note: the price of EPD was $21.64 today when this transaction was executed.
12/18/2015 3 EPD Put options expired
Note: EPD shares closed at $23.43 at 12/18/2015 options expiration.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $6,300.00
= $21.00*300

Net Profit:
(a) Options Income: +$199.80
= ($.70*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (EPD was above $21.00 strike price at Dec2015 expiration): +$0.00
= ($21.00-$21.00)*300 shares

Total Net Profit: +$199.80
= (+$199.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +3.2%
= +$199.80/$6,300.00
Annualized Return: +96.5%
= (+$199.80/$6,300.00)*(365/12 days)


4. Nationstar Mortgage Holdings Inc. (NSM) -- Position Closed
The transactions were as follows:
11/24/2015  Sold 4 NSM Dec2015 $12.00 100% cash-secured Put options @ $.40
Note: the price of NSM was $12.89 today when this transaction was executed.
12/18/2015 4 NSM Put options expired
Note: NSM shares closed at $12.39 at 12/18/2015 options expiration.

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $4,800.00
= $12.00*400

Net Profit:
(a) Options Income: +$149.05
= ($.40*400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (NSM was above $12.00 strike price at Dec2015 expiration): +$0.00
= ($12.00-$12.00)*400 shares

Total Net Profit: +$149.05
= (+$149.05 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +3.1%
= +$149.05/$4,800.00
Annualized Return: +45.3%
= (+$149.05/$4,800.00)*(365/25 days)

Established New Position in AmTrust Financial Services Inc.

Today, the Covered Calls Advisor established a new position in AmTrust Financial Services Inc. (ticker symbol AFSI) by selling three Jan2016 Put options at the $57.50 strike price. This position is a conservative one since it was established with 5.3% downside protection to the strike price.

As detailed below, the AmTrust Financial Services Inc. investment will yield a +1.7% absolute return in 29 days (which is equivalent to a +23.4% annualized return-on-investment) if AFSI closes above the $57.50 strike price on the Jan 15th options expiration date. 

This potential return is very nice given the downside protection (from the $60.70 stock price to the $57.50 strike price) when the position was established.  The implied volatility in the options was 32 when this position was established; so the $1.00 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1. AmTrust Financial Services Inc.(AFSI) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/18/2015  Sold 3 AFSI Jan2016 $57.50 100% cash-secured Put options @ $1.00
Note: the price of AFSI was $60.70 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
Note: the price of AmTrust Financial was $60.70 when these options were sold

Net Profit:
(a) Options Income: +$289.80
= ($1.00*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AFSI is above $57.50 strike price at the Jan2016 expiration): +$0.00
= ($57.50-$57.50)*300 shares

Total Net Profit (If AFSI is above $57.50 strike price at Jan2016 options expiration): +$289.80
= (+$289.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If AFSI is above $57.50 strike price at the Jan2016 options expiration): +1.7%
= +$289.80/$17,250.00
Annualized Return: +23.4%
= (+$289.80/$17,250.00)*(365/29 days)

The downside 'breakeven price' at expiration is at $56.50 ($57.50 - $1.00), which is 6.9% below the current market price of $60.70.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this AFSI short Puts position is 73%. This compares with a probability of profit of 50.3% for a buy-and-hold of AmTrust Financial stock over the same time period. Using this probability of profit of 73%, the expected value annualized return-on-investment (if held until expiration) is +17.1% (+23.4% * 73%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $61.70 ($60.70 + $1.00).  This is the price above which it would have been more profitable to simply buy-and-hold AmTrust Financial until the Jan2016 options expiration date rather than selling these Put options.

Established Covered Calls in Apple Inc. and JPMorgan Chase & Co.

Yesterday, Covered Calls positions with Jan2016 options expirations were established in Apple Inc. (ticker symbol AAPL) and JPMorgan Chase & Co. (JPM).

Apple was established as a Covered Calls position (rather than a comparable short 100% cash-secured Puts position) since the Implied Volatility (IV) was about one point higher (about 30) with the Calls than for the comparable Puts -- so the potential return-on-investment for the Covered Calls position was slightly higher than its comparable 100% cash-secured Puts position.

The JPMorgan position explicitly considers the potential for capturing the upcoming quarterly dividend of $.44 (ex-div date is Jan 4th, 2016). Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative in-the-money investments were made for both positions (with the strike prices below the stock prices when the positions were established).

As detailed below, the potential returns are:
1. Apple Inc.: +2.0% absolute return in 36 days (equivalent to a +20.5% annualized return-on-investment)
2. JPMorgan Chase Inc.: +2.2% absolute return in 36 days (equivalent to a +22.8% annualized return-on-investment) 
Note: The IV for the Call options at the time they were sold was 30 for Apple and 26 for JPMorgan, so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of 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:
12/11/2015  Bought 200 Apple Inc. shares @ $113.80
12/11/2015 Sold 2 AAPL Jan2016 $110.00 Call options @ $6.15
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 200 shares AAPL: $22,767.95
= $113.80*200 + $7.95 commission

Net Profit:
(a) Options Income: +$1,228.50
= ($6.15*200 shares) - $1.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL is above $110.00 strike price at Jan2016 expiration): -$767.95
= ($110.00-$113.80)*200 shares - $7.95 commissions

Total Net Profit (If AAPL is above $110.00 strike price at Jan2016 options expiration): +$460.55
= (+$1,228.50 options income +$0.00 dividends -$767.95 capital appreciation)

Absolute Return (If AAPL is above $110.00 strike price at Jan2016 options expiration): +2.0%
= +$460.55/$22,767.95
Annualized Return: +20.5%
= (+$460.55/$22,767.95)*(365/36 days)

The downside 'breakeven price' at expiration is at $107.65 ($113.80 - $6.15), which is 5.4% below the current market price of $113.80.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this Apple Inc. covered calls position is 65%. 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 65%, the Expected Value annualized ROI of this investment (if held until expiration) is +13.3% (+20.5% * 65%).

The 'crossover price' at expiration is $116.15 ($110.00 + $6.15).  This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until Jan 15th (the Jan2016 options expiration date) rather than establishing this covered calls position.


2. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position

A $.44 quarterly dividend goes ex-dividend on January 4th, 2016.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.05 [$3.32 option premium - ($64.77 stock price - $62.50 strike price)] remaining in the short call options decay substantially below the $.44 dividend amount by Dec 31st (the last business 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: +1.6% absolute return (equivalent to +23.9% annualized return for the next 24 days) if the stock is assigned early (on last business day prior to Jan 4th ex-div date); OR

If Dividend Capture:  +2.2% absolute return (equivalent to +22.8% annualized return over the next 36 days) if the stock is assigned at Jan2016 expiration on January 15th.

12/11/2015 Bought 200 JPM shares @ $64.77
12/11/2015 Sold 2 JPM Jan2016 $62.50 Call options @ $3.32
01/04/2016 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: $12,961.95
= ($64.77*200+$7.95 commission)

Net Profit:
(a) Options Income: +$665.50
= ($3.32*200 shares) - $1.50 commissions
(b) Dividend Income (If option exercised early on business day prior to Jan 4th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Jan2016 expiration): +$88.00
= ($.44 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Dec 31st): -$461.95
+($62.50 -$64.77)*200 - $7.95 commissions; or
(c) Capital Appreciation (If stock assigned at $62.50 at Jan2016 expiration): -$461.95
+($62.50 -$64.77)*200 - $7.95 commissions

Total Net Profit (If option exercised on last business day prior to Jan 4th ex-div date): +$203.55

= (+$665.50 +$0.00 -$461.95); or

Total Net Profit (If stock assigned at $62.50 at Jan2016 expiration): +$291.55

= (+$665.50 +$88.00 -$461.95)

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

= +$203.55/$12,961.95

Annualized Return (If option exercised early): +23.9%

= (+$203.55/$12,961.95)*(365/24 days); OR

2. Absolute Return (If stock assigned at $62.50 at Jan2016 expiration): +2.2%

= +$291.55/$12,961.95

Annualized Return (If stock assigned): +22.8%

= (+$291.55/$12,961.95)*(365/36 days)

Early assignment in this JPM position would provide a slightly 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 $62.50 strike price at assignment.  Alternatively, if the stock declines below the strike price, the breakeven price of $61.45 ($64.77 - $3.32) provides 5.1% of downside protection. 

------
In summary, these are both relatively conservative covered calls investments that provide nice annualized ROI potential if they remain at or above the strike price at the January 2016 options expiration date.

Established Covered Calls Position in Paccar Inc.

Today, a covered calls position was established in Paccar Inc. (ticker symbol PCAR) with a Jan2016 expiration.  This position includes consideration of an upcoming special dividend with an ex-div date of Dec 16th.  A generous $1.40 special dividend is being provided because of the positive year-to-year sales trend in Paccar's two primary markets (U.S. and Europe).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established (with the strike price of $45.00 being below the stock purchase price of $48.97).

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

If Early Assignment: +0.8% absolute return (equivalent to +51.3% annualized return for the next 6 days) if the stock is assigned early (business day prior to Dec 16 ex-date); OR

If Dividend Capture: +3.7% absolute return (equivalent to +36.5% annualized return over the next 37 days) if the stock is assigned at Jan2016 expiration on January 15th.

1. Paccar Inc. (PCAR) -- New Covered Calls Position

The $1.40 special dividend of Dec 16th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.50 [$4.47 option premium - ($48.97 stock price - $45.00 strike price)] remaining in the short call option decays substantially by December 15th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the PCAR shares away to capture the dividend.

The transactions were:
12/10/2015 Bought 200 PCAR shares @ $48.97
12/10/2015 Sold 2 PCAR Jan2016 $45.00 Call options @ $4.47
Note: a simultaneous buy/write transaction was executed.
12/16/2015 Upcoming special dividend of $1.40 per share

Two possible overall performance results (including commissions) for this PCAR covered calls position are as follows:
Stock Purchase Cost: $9,801.95
= ($48.97*200+$7.95 commission)

Net Profit:
(a) Options Income: +$884.55
= ($4.47*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Dec 16th ex-dividend date): +$0.00; or
(b) Dividend Income (If PCAR assigned at Jan2016 expiration): +$280.00
= ($1.40 dividend per share x 200 shares)

(c) Capital Appreciation (If PCAR assigned early on Dec 15th): -$801.95
+($45.00-$48.97)*200 - $7.95 commissions; or
(c) Capital Appreciation (If PCAR assigned at $45.00 at Jan2016 expiration): -$801.95
+($45.00-$48.97)*200 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 16 ex-div date): +$82.60

= (+$884.55 +$0.00 -$801.95); or

Total Net Profit (If PCAR assigned at $45.00 at Jan2016 expiration): +$362.60

= (+$884.55 +$280.00 -$801.95)

1. Absolute Return [If option exercised on Dec 15th (business day prior to ex-dividend date)]: +0.8%

= +$82.60/$9,801.95

Annualized Return (If option exercised early): +51.3%

= (+$82.60/$9,801.95)*(365/6 days); OR

2. Absolute Return (If PCAR assigned at $45.00 at Jan2016 expiration): +3.7%

= +$362.60/$9,801.95

Annualized Return: +36.5%

= (+$362.60/$9,801.95)*(365/37 days)

Either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $45.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $44.50 ($48.97 -$4.47) provides 9.1% downside protection below today's purchase price.

Established Covered Calls in MetLife Inc.

Today, a new covered calls position was established in MetLife Inc. (ticker symbol MET).  Three hundred shares of MET were purchased at $48.43 and three in-the-money Dec2015 Call options were simultaneously sold at the $47.50 strike price for $1.51 each.
As shown below, this investment will provide a +1.1% absolute return in 10 days (which is equivalent to a +39.1% annualized return) if MetlLife stock remains above the $47.50 strike price on the December 18th options expiration date.

This potential return-on-investment result is attractive to us option sellers given this conservative investment -- there is 1.9% downside protection (from the current $48.43 stock price to the $47.50 strike price).  The implied volatility in the options was approximately 31 when this position was established and there are no quarterly earnings or ex-dividends prior to the expiration date at the end of next week. 

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

1. MetLife Inc. (MET)
The transactions were as follows:
12/09/2015 Bought 300 MetLife Inc. @ $48.43
12/09/2015 Sold 3 MET Dec2015 $47.50 Call Options @ $1.51

A possible overall performance result (including commissions) for these MetLife Inc. covered calls is as follows:
Stock Purchase Cost: $14,536.95
= ($48.43*300+$7.95 commission)

Net Profit:
(a) Options Income: +$442.80
= 300*$1.51 - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MET assigned at $47.50) = -$286.95
= ($47.50-$48.43)*300 - $7.95 commissions

Total Net Profit (If MET assigned at $47.50): +$155.85
= (+$442.80 +$0.00 -$286.95)

Absolute Return if Assigned (at $47.50 strike price): +1.1%
= +$155.85/$14,536.95
Annualized Return If Assigned (ARIA): +39.1%
= (+$155.85/$14,536.95)*(365/10 days)

The downside 'breakeven price' at expiration is at $46.92 ($48.43 - $1.51), which is 3.1% below the current market price of $48.43.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Dec2015 options expiration) for this MetLife covered calls position is 65%. This compares with a probability of profit of 50.2% for a buy-and-hold of MET stock over the same time period. Using this probability of profit of 65%, the Expected Value annualized ROI of this investment (if held until expiration) is +25.4% (+39.1% * 65%).

The 'crossover price' at expiration is $49.94 ($48.43 + $1.51). This is the price above which it would have been more profitable to simply buy-and-hold MetLife stock until Decmber 18th (the Dec2015 options expiration date) rather than establish this covered calls position.

Established Position in Nationstar Mortgage Holdings Inc.

Today, the Covered Calls Advisor established a new position in Nationstar Mortgage Holdings Inc. (ticker symbol NSM) by selling three Jan2016 Put options at the $12.00 strike price when the price of the underlying stock was $11.68.

As detailed below, the Nationstar Mortgage Holdings Inc. investment will yield a +4.9% absolute return in 39 days (which is equivalent to a +46.2% annualized return-on-investment) if NSM stock is unchanged at $11.68.  If the stock value rises above the $12.00 strike at the Jan 15th expiration, a +7.6% absolute return (+71.2% annualized) will be achieved. 

The implied volatility in the options was 49 when this position was established; so the $.95 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     


1. Nationstar Mortgage Holdings Inc. (NSM) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
12/08/2015  Sold 3 NSM Jan2016 $12.00 100% cash-secured Put options @ $.95
Note: the price of NSM was $11.68 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.

Two possible overall performance results (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $3,600.00
= $12.00*300
Note: the price of NSM was $11.68 when these options were sold

Net Profit:
(a) Options Income: +$273.80
= ($.95*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NSM is unchanged at $11.68 at Jan2016 expiration): -$96.00
= ($11.68 -$12.00)*300 shares; or
(c) Capital Appreciation (If NSM is above $12.00 strike price at Jan2016 expiration): +$0.00
= ($12.00-$12.00)*300 shares

Total Net Profit (If NSM is unchanged at $11.68 at Jan2016 expiration): +$177.80
= (+$273.80 options income +$0.00 dividend income -$96.00 capital appreciation); or
Total Net Profit (If NSM is above $12.00 strike price at Jan2016 options expiration): +$273.80
= (+$273.80 options income +$0.00 dividend income +$0.00 capital appreciation)

1. Absolute Return (If NSM is unchanged at $11.68 at Jan2016 expiration): +4.9%
= +$177.80/$3,600.00
Annualized Return if Unchanged: +46.2%
= (+$177.80/$3,600.00)*(365/39 days); or
2. Absolute Return if Assigned (If NSM is above $12.00 strike price at Jan2016 options expiration): +7.6%
= +$273.80/$3,600.00
Annualized Return: +71.2%
= (+$273.80/$3,600.00)*(365/39 days)

The downside 'breakeven price' at expiration is at $11.05 ($12.00 - $.95), which is 8.1% below the current market price of $11.68.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this Nationstar Mortgage short Puts position is 46%. This compares with a probability of profit of 50.3% for a buy-and-hold of Nationstar stock over the same time period. Using this probability of profit of 46%, the expected value annualized return-on-investment (if held until expiration and the stock price is unchanged at $11.68) is +21.3% (+46.2% * 46%).

The 'crossover price' at expiration is $12.63 ($11.68 + $.95).  This is the price above which it would have been more profitable to simply buy-and-hold NSM until Jan 15th (the Jan2016 options expiration date) rather than selling these Put options.

Established Covered Calls Position in iShares MSCI Emerging Markets ETF

Today, a covered calls position was established in iShares MSCI Emerging Markets ETF (ticker symbol EEM) with a Jan2016 expiration.  This position includes consideration of an upcoming semi-annual distribution with an ex-date of Dec 21st.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established (with the strike price of $32.00 being below the stock purchase price of $32.59).

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

If Early Assignment: +1.3% absolute return (equivalent to +37.8% annualized return for the next 13 days) if the stock is assigned early (business day prior to Dec 21 ex-date); OR

If Distribution Capture: +2.9% absolute return (equivalent to +27.0% annualized return over the next 39 days) if EEM is assigned at Jan2016 expiration on January 15th.

1. iShares MSCI Emerging Markets ETF (EEM) -- New Covered Calls Position
The estimated $.50 distribution of Dec 21st is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.50 [$1.09 option premium - ($32.59 purchase price - $32.00 strike price)] remaining in the short call option decays substantially by December 20th (the business day prior to the ex-date), then it is possible that the call options owner would exercise early and call the EEM shares away to capture the dividend. 

The transactions were:
12/08/2015 Bought 300 iShares MSCI Emerging Markets ETF shares @ $32.59
12/08/2015 Sold 3 EEM Jan2016 $32.00 Call options @ $1.09
Note: a simultaneous buy/write transaction was executed.
12/21/2015 Upcoming distribution estimated at $.50 per share

Two possible overall performance results (including commissions) for this EEM covered calls position are as follows:
Stock Purchase Cost: $9,784.95
= ($32.59*300+$7.95 commission)

Net Profit:
(a) Options Income: +$316.80
= ($1.09*300 shares) - $10.20 commissions
(b) Distribution Income (If option exercised early on business day prior to Dec 21st ex-date): +$0.00; or
(b) Distribution Income (If EEM assigned at Jan2016 expiration): +$150.00
= ($.50 distribution per share x 300 shares)

(c) Capital Appreciation (If EEM assigned early on Dec 15th): -$184.95
+($32.00-$32.59)*300 - $7.95 commissions; or
(c) Capital Appreciation (If EEM assigned at $32.00 at Jan2016 expiration): -$184.95
+($32.00-$32.59)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 21 ex-distribution date): +$131.85

= (+$316.80 +$0.00 -$184.95); or

Total Net Profit (If EEM assigned at $32.00 at Jan2016 expiration): +$281.85

= (+$316.80 +$150.00 -$184.95)

1. Absolute Return [If option exercised on Dec 20th (business day prior to ex-distribution date)]: +1.3%

= +$131.85/$9,784.95

Annualized Return (If option exercised early): +37.8%

= (+$131.85/$9,784.95)*(365/13 days); OR

2. Absolute Return (If EEM assigned at $32.00 at Jan2016 expiration): +2.9%

= +$281.85/$9,784.95

Annualized Return: +27.0%

= (+$281.85/$9,784.95)*(365/39 days)

Either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $32.00 strike price at assignment.  If EEM declines below the strike price, the breakeven price of $31.50 ($32.59 -$1.09) provides 3.3% downside protection below today's purchase price.

Established New Position in Enterprise Products Partners LP

Today, the Covered Calls Advisor established a new position in Enterprise Products Partners LP (ticker symbol EPD) by selling three Dec2015 Put options at the $21.00 strike price. This position is a conservative one since it was established with 3.0% downside protection to the strike price.

As detailed below, the Enterprise Products Partners investment will yield a +3.2% absolute return in 12 days (which is equivalent to a +96.5% annualized return-on-investment) if EPD closes above the $21.00 strike price on the Dec 18th options expiration date. 

This potential return is very nice given the downside protection (from the $21.64 stock price to the $21.00 strike price) when the position was established.  Because of the recent rapid decline in Master Limited Partnerships (MLPs), including another 5% today when this position was established, the implied volatility in the options had ballooned to 55; so the $.70 per share price when the Puts were sold is a very attractive premium received.     

1. Enterprise Products Partners LP (EPD) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/07/2015  Sold 3 EPD Dec2015 $21.00 100% cash-secured Put options @ $.70
Note: the price of EPD was $21.64 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: $6,300.00
= $21.00*300
Note: the price of EPD was $21.64 when these options were sold

Net Profit:
(a) Options Income: +$199.80
= ($.70*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EPD is above $21.00 strike price at Dec2015 expiration): +$0.00
= ($21.00-$21.00)*300 shares

Total Net Profit (If EPD is above $21.00 strike price at Dec2015 options expiration): +$199.80
= (+$199.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If EPD is above $21.00 strike price at Dec2015 options expiration): +3.2%
= +$199.80/$6,300.00
Annualized Return: +96.5%
= (+$199.80/$6,300.00)*(365/12 days)

The downside 'breakeven price' at expiration is at $20.30 ($21.00 - $.70), which is 6.2% below the current market price of $21.64.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this EPD short Puts position is 65%. This compares with a probability of profit of 50.4% for a buy-and-hold of EPD stock over the same time period. Using this probability of profit of 65%, the expected value annualized return-on-investment (if held until expiration) is +62.7% (+96.5% * 65%), an extraordinarily high value for this investment.  

The 'crossover price' at expiration is $22.34 ($21.64 + $.70).  This is the price above which it would have been more profitable to simply buy-and-hold Enterprise Products Partners until the Dec2015 options expiration date

Country Market Value Rankings

The Covered Calls Advisor has just completed an update of the methodology for determining the relative investing worthiness of twenty-three countries and two regions (Europe and Emerging Markets) around the world.  The updated "Country Market Value Rankings" table below is based on a weighted-average ranking system.  The eight indicators used to calculate these rankings are as follows:

Today's ranking, shown in the table below, provides a value-oriented and objective framework that assists this advisor in making decisions regarding overweighting and underweighting specific countries and regions in the Covered Calls Advisor's Portfolio.

 


 


From the chart above, the resulting overall market ratings for individual countries and regions are:
Very Bullish (Above 28 total points) -- None
Bullish (22-28 points) -- China
Slightly Bullish (17-22 points) -- Singapore, South Korea, Taiwan, and Emerging Markets
Neutral (12-17 points) -- Sweden, Malaysia, Switzerland, Germany, Hong Kong, Netherlands, India, Mexico, and Australia
Slightly Bearish (8-12 points) --Spain, USA, Europe, Canada, Russia, and United Kingdom
Bearish (2-8 points) -- France, South Africa, Italy, and Japan
Very Bearish (below 2 points) -- Brazil


An unweighted stocks portfolio allocation would be as follows:

However, future investments in the Covered Calls Advisor Portfolio will overweight higher rated countries/regions and underweight lower rated ones. It should also be noted that the U.S. is currently ranked 16th of the 25 ratings and the overall rating for the U.S. is Slightly Bearish.

This Country Value Rankings spreadsheet is detailed in terms of both the methodology used and the resources used to capture the information for each country. If you would like further information or clarification, please email your comments and questions (to the address in the top right sidebar of this blog). They are always welcomed.

Hopefully, this information is helpful in your thinking and analysis of your own equities selection methods related to your covered calls investing process!  Going forward, it is my intention to update this information quarterly.

Regards and Godspeed to All,
Jeff

Established New Position in AmTrust Financial Services Inc.

Today, the Covered Calls Advisor established a new position in AmTrust Financial Services Inc. (ticker symbol AFSI) by selling three Dec2015 Put options at the $60.00 strike price. This position is a conservative one since it was established with 4.1% downside protection to the strike price.

As detailed below, the AmTrust Financial Services Inc. investment will yield a +1.0% absolute return in 16 days (which is equivalent to a +24.3% annualized return-on-investment) if AFSI closes above the $60.00 strike price on the Dec 18th options expiration date. 

This potential return is very nice given the downside protection (from the $62.55 stock price to the $60.00 strike price) when the position was established.  The implied volatility in the options was 30 when this position was established; so the $.65 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1. AmTrust Financial Services Inc.(AFSI) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/03/2015  Sold 3 AFSI Dec2015 $60.00 100% cash-secured Put options @ $.65
Note: the price of AFSI was $62.55 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: $18,000.00
= $60.00*300
Note: the price of AmTrust Financial was $62.55 when these options were sold

Net Profit:
(a) Options Income: +$184.80
= ($.65*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AFSI is above $60.00 strike price at Dec2015 expiration): +$0.00
= ($60.00-$60.00)*300 shares

Total Net Profit (If AFSI is above $60.00 strike price at Dec2015 options expiration): +$184.80
= (+$184.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If AFSI is above $60.00 strike price at Dec2015 options expiration): +1.0%
= +$184.80/$18,000.00
Annualized Return: +23.4%
= (+$184.80/$18,000.00)*(365/16 days)

The downside 'breakeven price' at expiration is at $59.35 ($60.00 - $.65), which is 5.1% below the current market price of $62.55.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this AFSI short Puts position is 74%. This compares with a probability of profit of 50.3% for a buy-and-hold of AmTrust stock over the same time period. Using this probability of profit of 74%, the expected value annualized return-on-investment (if held until expiration) is +18.0% (+24.3% * 74%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $63.20 ($62.55 + $.65).  This is the price above which it would have been more profitable to simply buy-and-hold AmTrust Financial until the Dec2015 options expiration date rather than selling these Put options.

Exploiting Our Covered Calls Investing "Edges"

Below is a reprint of an article I wrote for this blog over 5 years ago. I believe the concepts discussed continue to be as valid today as they were then.
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For any given investing strategy, the investor should try to identify any and all discernible advantages that particular strategy has when compared against a basic buy-and-hold approach. Once these potential advantages are identified, it is important to establish an investing process that attempts to exploit these advantages. The term that this Covered Calls Advisor prefers for the specific advantages identified is our investing "edges". Identifying and then establishing a disciplined investing process to exploit these "edges" is what enables us to attain additional profit beyond that which would otherwise be obtained through a passive buy-and-hold strategy. 

So what are our "edges" as Covered Calls investors? It is this advisor's belief that there are six edges, each of which enhances our opportunity to achieve excess returns:

1. Specialize in Covered Calls Investing -- Here is the introduction to one of my prior blog posts: "One of the most important investing lessons I've learned is to select an investing strategy that you are most comfortable with and stay with it. That is, do not try to be "a jack-of-all-trades and a master of none." Instead, try to continually increase your knowledge related to the strategy you are using and seek to become an expert at it." This fundamental belief in combination with the performance results achieved is what has sustained my commitment to covered calls investing during the past three decades -- thus this Covered Calls Advisor's investing motto of "Stick with Covered Calls."
I was recently reminded of my uncommon commitment to covered calls (and the investing edge it provides) while reading this article: (See "7 Things To Do To Improve"). Charles Kirk concludes in item #7 titled "Become a specialist, not a jack of all trades", by saying "So, find something that interests you more than anything else and concentrate all of your time and focus on that one thing. That path will lead you to developing a clear edge that will provide huge profits to you down the line." I hope you agree with me and will consider making covered calls investing "that one thing" you will "focus on" to achieve a "clear edge".

2. Active Management -- The typical buy-and-hold investing strategy is a passive investing approach since stocks or mutual funds are normally purchased and held for a period of years. Likewise, covered calls investing can also be deployed passively, and passive covered-calls-related indices (for example BXM, BXY, and PUT) have been developed. Research has shown that the long-term returns performance of these indices are approximately equivalent to that of a comparable buy-and-hold investment. But as individual investors, we have the opportunity to be "active" (contrasted with "passive") managers of our covered calls portfolios. As active managers, an associated "edge" comes from making timely adjustments (for example, position rolling decisions) related to our existing covered calls positions.

3. Value-Oriented Stock Selection -- Good stock selection is Job #1 for the covered calls investor. Unlike broad-based indices such as the S&P 500 or BXM, we seek to purchase only value-oriented individual equities, which are likely to continue in the future (as they have historically), to outperform the broader indices (such as the S&P 500).

4. Adjust Moneyness of Strike Prices -- As active covered calls investors, we have the flexibility to sell out-of-the-money covered calls when our outlook is more bullish and in-the-money when bearish; whereas the mechanical indices sell the same moneyness every month (for example, only at-the-money calls in the case of BXM). With even modest success at adjusting moneyness to coincide with our overall market outlook, incremental return results are achieved.

5. Sell Higher-Than-Average Volatility -- Because of the large cap nature and the diversification inherent in the S&P 500 index, its Volatility Index(VIX) is lower than most individual stocks. Selling options on individual equities (with somewhat higher implied volatility than VIX) provides covered calls investors with somewhat higher options income (and thus somewhat higher overall portfolio returns) than would be achieved by either (1) buy-and-hold investing directly in the S&P 500; or (2) selling S&P 500 options (such as is done with the BXM, BXY, and PUT indices).

6. Exploiting the Volatility Risk Premium -- Academic research has demonstrated that the implied volatility of option prices is, on average, higher than the actual realized volatility. Thus, by selling options to establish our covered calls positions (NOT buying options), we Covered Calls investors exploit this effect (another "edge" versus buy-and-hold investors) and profit from it.

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From my experience, my best estimate is that over a long-term investing horizon (say 10+ years), a disciplined covered calls investor that is cognizant of the six "edges" described above, and works to take advantage of them might expect (on average over the years), to outperform a buy-and-hold benchmark by about 3% to 5% per year. This extra return might not sound especially impressive, but the power of compounding investment returns is substantial. Suppose that over the next decade a buy-and-hold S&P 500 investor averages an 8% annualized return; and a covered calls investor averages a 12% return. Then, an initial $100,000 portfolio would grow (excluding taxes) over the next 10 years, to about $215,900 for a buy-and-hold portfolio; but to $310,600 for the covered calls portfolio. Whereas individually, each of the six "edges" described above provides only a small advantage, together they can provide a very significant advantage for covered calls investors.
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"We believe that while investors need to focus great attention on the fundamentals, they must simultaneously answer the question: What's your edge? To succeed in today's overcrowded environment, investors need an edge, an advantage over the competition, to help them allocate their scarce time. Since most everyone has access to complete and accurate databases, powerful computers, and well-trained analytical talent, these resource provide less and less of a competitive edge; they are necessary but not sufficient. You cannot have an edge doing what everyone else is doing; to add value you must stand apart from the crowd. And when you do, you benefit from watching the competition at work." -- Seth Klarman

If you have any comments or questions on this article or on any of the six "edges" presented, please email me at the address shown in the top-right sidebar of this blog. Your comments are always welcomed.

Regards and Godspeed,
Jeff

Established Two New Positions

Today, positions were established in iShares China Large-Cap ETF (ticker symbol FXI) and Cal-Maine Foods Inc. (CALM).  FXI is a covered calls position with a Jan2016 expiration that explicitly considers the potential for capturing the upcoming semi-annual ex-distribution expected on Dec 18th.  For Cal-Maine, Dec2015 100% cash-secured Put options were sold (in lieu of a comparable covered calls position) since the implied volatility of the Puts exceeded that of the Calls (thus providing a higher potential return-on-investment result).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for both positions (with the strike prices below the stock prices when the positions were established).

As detailed below, the potential returns are:
1. iShares China Large-Cap ETF: +2.3% absolute return in 46 days (equivalent to a +18.1% annualized return-on-investment)
2. Cal-Maine Foods Inc.: +2.3% absolute return in 18 days (equivalent to a +47.6% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 25 for iShares China Large-Cap ETF and 43 for Cal-Maine Foods Inc., so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.  


1. iShares China Large-Cap ETF (FXI) -- New Covered Call Position

A semi-annual distribution is expected on December 18th.  The amount of the distribution has not yet been declared, but a best estimate of $.50 is included in the potential results analysis below.  Although very unlikely, if the current time value (i.e. extrinsic value) of $.42 [$2.02 option premium - ($37.60 stock price - $36.00 strike price)] remaining in the short call option decays substantially below the approximately $.50 distribution amount by December 17th (the business day prior to the ex-distribution date), then there is a possibility (although unlikely) that the call option owner would exercise early and call FXI away to capture the distribution.

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

If Early Assignment: +1.0% absolute return (equivalent to +20.5% annualized return for the next 17 days) if the stock is assigned early (business day prior to Dec 18 ex date); OR

If Dividend Capture: +2.3% absolute return (equivalent to +18.1% annualized return over the next 46 days) if the stock is assigned at Jan2016 expiration on January 15th.

The transactions were:
12/01/2015 Bought 300 FXI shares @ $37.60
12/01/2015 Sold 3 FXI Jan2016 $36.00 Call options @ $2.02
Note: a simultaneous buy/write transaction was executed.
12/18/2015 Upcoming semi-annual distribution estimated at $.50 per share

Two possible overall performance results (including commissions) for this FXI covered calls position are as follows:
Stock Purchase Cost: $11,287.95
= ($37.60*300+$7.95 commission)

Net Profit:
(a) Options Income: +$595.80
= ($2.02*300 shares) - $10.20 commissions
(b) Distribution Income (If option exercised early on business day prior to Dec 18th ex-distribution date): +$0.00; or
(b) Distribution Income (If FXI assigned at Jan2016 expiration): +$150.00
= ($.50 dividend per share x 300 shares)

(c) Capital Appreciation (If FXI assigned early on Dec 17th): -$487.95
+($36.00-$37.60)*300 - $7.95 commissions; or
(c) Capital Appreciation (If FXI assigned at $36.00 at Jan2016 expiration): -$487.95
+($36.00-$37.60)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 18 ex-distribution date): +$107.85

= (+$595.80 +$0.00 -$487.95); or

Total Net Profit (If FXI assigned at $36.00 at Jan2016 expiration): +$257.85

= (+$595.80 +$150.00 -$487.95)

1. Absolute Return [If option exercised on Dec 17th (business day prior to ex-distribution date)]: +1.0%

= +$107.85/$11,287.95

Annualized Return (If option exercised early): +20.5%

= (+$107.85/$11,287.95)*(365/17 days); OR

2. Absolute Return (If FXI assigned at $36.00 at Jan2016 expiration): +2.3%

= +$257.85/$11,287.95

Annualized Return: +18.1%

= (+$257.85/$11,287.95)*(365/46 days)

In this instance, early assignment provides a slightly annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $36.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $35.58 ($37.60 -$2.02) provides a substantial 5.4% downside protection below today's purchase price.


2. Cal-Maine Foods Inc. (CALM) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/01/2015  Sold 4 CALM Dec2015 $50.00 100% cash-secured Put options @ $1.20
Note: the price of CALM was $52.10 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.

This morning there was some aggressive selling of Cal-Maine stock in reaction (this advisor believes it is an over-reaction) to some BB&T commentary about pricing softness in the current quarter for shell eggs (Cal-Maine is the leading U.S. producer).   The Covered Calls Advisor has been analyzing Cal-Maine for several weeks and decided to use today's price weakness accompanied by an increase in CALM's implied volatility to 43 for the Dec2015 $50.00 Puts as an opportunity to enter this position in Cal-Maine. 

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $50.00*400
Note: the price of Cal-Maine was $52.10 when these options were sold

Net Profit:
(a) Options Income: +$469.05
= ($1.20*400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CALM is above $50.00 strike price at Dec2015 expiration): +$0.00
= ($50.00-$50.00)*400 shares

Total Net Profit (If CALM is above $50.00 strike price at Dec2015 options expiration): +$469.05
= (+$469.05 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If CALM is above $50.00 strike price at Dec2015 options expiration): +2.3%
= +$469.05/$20,000.00
Annualized Return: +47.6%
= (+$469.05/$20,000.00)*(365/18 days)

The downside 'breakeven price' at expiration is at $48.80 ($50.00 - $1.20), which is 6.3% below the current market price of $52.10.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this Cal-Maine short Puts position is 65%. This compares with a probability of profit of 50.2% for a buy-and-hold of Cal-Maine stock over the same time period. Using this probability of profit of 65%, the expected value annualized return-on-investment (if held until expiration) is +30.9% (+47.60% * 65%), a very attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $53.30 ($52.10 + $1.20).  This is the price above which it would have been more profitable to simply buy-and-hold CALM until the Dec2015 options expiration date rather than selling these Put options.