Established Positions in Capital One Financial Corp. and Energy Select Sector SPDR Fund ETF

Today, positions were established in Capital One Financial Corp.(ticker symbol COF) and the Energy Select Sector SPDR Fund ETF (ticker XLE).  Capital One is a covered calls position with a Feb2016 expiration that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.40 expected on Feb11th.  For XLE, two March 2016 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. Capital One Financial Corp: +1.5% absolute return in 19 days (equivalent to a +29.1% annualized return-on-investment)
2. Energy Select Sector SPDR Fund ETF: +3.9% absolute return in 47 days (equivalent to a +30.5% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 25 for Capital One and 36 for the Energy Select Sector SPDR Fund ETF, 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. Capital One Financial Corp (COF) -- New Covered Call Position

A quarterly dividend is expected on Feb 11th.  The amount has not yet been declared, but a regular $.40 dividend is expected and is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.67 [$3.00 option premium - ($64.83 stock price - $62.50 strike price)] remaining in the short call options decay substantially below the $.40 dividend amount by February 10th (the business day prior to the ex-dividend date), then there is a possibility that the Call options owner would exercise early and therefore call the 200 COF shares away to capture the dividend payment.

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

If Early Assignment: +0.9% absolute return (equivalent to +32.8% annualized return for the next 10 days) if the stock is assigned early (business day prior to Feb 11 ex date); OR

If Dividend Capture: +1.5% absolute return (equivalent to +29.1% annualized return over the next 19 days) if the stock is assigned at the Feb2016 expiration on February 19th.

The transactions were:
02/01/2016 Bought 200 COF shares @ $64.83
02/01/2016 Sold 2 COF Feb2016 $62.50 Call options @ $3.00
Note: a simultaneous buy/write transaction was executed.
02/11/2016 Upcoming ex-dividend of $.40 per share

Two possible overall performance results (including commissions) for this COF covered calls position are as follows:
Stock Purchase Cost: $12,973.95
= ($64.83*200+$7.95 commission)

Net Profit:
(a) Options Income: +$590.55
= ($3.00*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 11th ex-div date): +$0.00; or
(b) Dividend Income (If COF assigned at Feb2016 expiration): +$80.00
= ($.40 dividend per share x 200 shares)

(c) Capital Appreciation (If COF assigned early on Feb 10th): -$473.95
+($62.50-$64.83)*200 - $7.95 commissions; or
(c) Capital Appreciation (If COF assigned at $62.50 at Feb2016 expiration): -$473.95
+($62.50-$64.83)*200 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Feb 11th ex-dividend date): +$116.60

= (+$590.55 +$0.00 -$473.95); or

Total Net Profit (If COF assigned at $62.50 at Feb2016 expiration): +$196.60

= (+$590.55 +$80.00 -$473.95)

1. Absolute Return [If option exercised on Feb 10th (business day prior to ex-dividend date)]: +0.9%

= +$116.60/$12,973.95

Annualized Return (If option exercised early): +32.8%

= (+$116.60/$12,973.95)*(365/10 days); OR

2. Absolute Return (If COF assigned at $62.50 at Feb2016 expiration): +1.5%

= +$196.60/$12,973.95

Annualized Return: +29.1%

= (+$196.60/$12,973.95)*(365/19 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 $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $61.83 ($64.83 -$3.00) provides a substantial 4.6% downside protection below today's purchase price.


2. Energy Select Sector SPDR Fund ETF (XLE) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
02/01/2016  Sold 2 XLE Mar2016 $55.00 100% cash-secured Put options @ $2.21
Note: the price of XLE was $56.78 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: $11,000.00
= $55.00*200
Note: the price of XLE was $56.78 when these options were sold

Net Profit:
(a) Options Income: +$432.55
= ($2.21*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If XLE is above $55.00 strike price at Mar2016 expiration): +$0.00
= ($55.00-$55.00)*200 shares

Total Net Profit (If XLE is above $55.00 strike price at Mar2016 options expiration): +$432.55
= (+$432.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If XLE is above $55.00 strike price at Mar2016 options expiration): +3.9%
= +$432.55/$11,000.00
Annualized Return: +30.5%
= (+$432.55/$11,000.00)*(365/47 days)

The downside 'breakeven price' at expiration is at $52.79 ($55.00 - $2.21), which is 7.0% below the current market price of $56.78.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 18th, 2016 options expiration) for this XLE short Puts position is 61%. This compares with a probability of profit of 50.3% for a buy-and-hold of XLE shares over the same time period. Using this probability of profit of 61%, the expected value annualized return-on-investment (if held until expiration) is +18.6% (+30.5% * 61%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $58.99 ($56.78 + $2.21).  This is the price above which it would have been more profitable to simply buy-and-hold XLE until the Mar2016 options expiration date rather than selling these Put options.