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
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
+($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.
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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.
