The Covered Calls Advisor Portfolio (CCAP) has been idle (100% cash) since April 18th, when the S&P 500 (SPY) closed at 209.24. With SPY having declined by 4% since then (largely as a result of last week's Brexit vote), the implied volatility of options has moved substantially higher and selling options offers an attractive return-on-investment opportunity. Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for each of the four positions (with the strike prices below the stock prices). The CCAP is now about 25% invested and 75% cash.
For the Alphabet, Home Depot, and S&P 500 positions, July2016 100% cash-secured Put options were sold (instead of establishing comparable covered calls positions) since the implied volatility of the Puts exceeded that of the Calls (thus providing a slightly higher potential return-on-investment result). JPMorgan Chase is a covered calls position that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.48 on July 1st.
As detailed below, the potential returns are:
1. Alphabet Inc.: +1.5% absolute return in 19 days (equivalent to a +28.3% annualized return-on-investment)
2. Home Depot Inc.: +0.8% absolute return in 19 days (equivalent to a +16.3% annualized return-on-investment)
3. JPMorgan Chase & Co.: +2.0% absolute return in 19 days (equivalent to a +37.7% annualized return-on-investment)
4. S&P 500 ETF: +0.9% absolute return in 19 days (equivalent to a +19.8% annualized return-on-investment)
Note: in each case, the Implied Volatility (IV) of the options at the time they were sold 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. Alphabet Inc. (GOOGL) -- New 100% Cash-Secured Puts Position
06/27/2016 Sold 1 GOOGL Jul2016 $665.00 100% cash-secured Put option @ $9.90
Note: the price of GOOGL was $679.87 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 option sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $66,500.00
= $665.00*100
Net Profit:
(a) Options Income: +$981.30
= ($9.90*100 shares) - $8.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GOOGL is above $665.00 strike price at Jul2016 expiration): +$0.00
= ($665.00-$665.00)*100 shares
Total Net Profit (If GOOGL is above $665.00 strike price at Jul2016 options expiration): +$981.30
= (+$981.30 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If GOOGL is above $665.00 strike price at Jul2016 options expiration): +1.5%
= +$981.30/$66,500.00
Annualized Return: +28.3%
= (+$981.30/$66,500.00)*(365/19 days)
The downside 'breakeven price' at expiration is at $655.10 ($665.00 - $9.90), which is 3.6% below the current market price of $679.87.
The 'crossover price' at expiration is $689.77 ($679.87 + $9.90). This is the price above which it would have been more profitable to buy-and-hold GOOGL until the Jul2016 options expiration date rather than selling these Put options.
2. Home Depot Inc. (HD) -- New 100% Cash-Secured Puts Position
06/27/2016 Sold 3 HD Jul2016 $120.00 100% cash-secured Put options @ $1.05
Note: the price of HD was $125.09 today when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $36,000.00
= $120.00*300
Net Profit:
(a) Options Income: +$304.80
= ($1.05*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HD is above $120.00 strike price at Jul2016 expiration): +$0.00
= ($120.00-$120.00)*300 shares
Total Net Profit (If HD is above $120.00 strike price at Jul2016 options expiration): +$304.80
= (+$304.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If HD is above $120.00 strike price at Jul2016 options expiration): +0.8%
= +$304.80/$36,000.00
Annualized Return: +16.3%
= (+$304.80/$36,000.00)*(365/19 days)
The downside 'breakeven price' at expiration is at $118.95 ($120.00 - $1.05), which is 4.9% below the current market price of $125.09.
The 'crossover price' at expiration is $126.14 ($125.09 + $1.05). This is the price above which it would have been more profitable to buy-and-hold HD until the Jul2016 options expiration date rather than selling these Put options.
3. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
As shown below, two potential return-on-investment results for this position are:
If Early
Assignment: +1.1% absolute return (equivalent to +69.1% annualized
return for the next 6 days) if the stock is assigned early (business
day prior to July 1st ex date); OR
If Dividend Capture: +2.0%
absolute return (equivalent to +37.7% annualized return over the next 19
days) if the stock is assigned at the Jul2016 expiration on July 15th. The transactions were:
06/27/2016 Bought 500 JPM shares @ $58.14
06/27/2016 Sold 5 JPM Jul2016 $55.00 Call options @ $3.84
Note: a simultaneous buy/write transaction was executed.
07/01/2016 Upcoming quarterly ex-dividend of $.48 per share
Two possible overall performance results (including commissions) for this JPM covered calls position are as follows:
Stock Purchase Cost: $29,077.95
= ($58.14*500+$7.95 commission)
Net Profit:
(a) Options Income: +$1,908.30
= ($3.84*500 shares) - $11.70 commissions
(b) Dividend Income (If option exercised early on business day prior to July 1st ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Jul2016 expiration): +$240.00
= ($.48 dividend per share x 500 shares)
(c) Capital Appreciation (If JPM assigned early on June 31st): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $55.00 at Jul2016 expiration): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions
+($55.00-$58.14)*500 - $7.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $55.00 at Jul2016 expiration): -$1,577.95
+($55.00-$58.14)*500 - $7.95 commissions
Total Net Profit (If option exercised on day prior to July 1st ex-dividend date): +$330.35
= (+$1,908.30 +$0.00 -$1,577.95); or
Total Net Profit (If JPM assigned at $55.00 at Jul2016 expiration): +$570.35
= (+$1,908.30 +$240.00 -$1,577.95)
1. Absolute Return [If option exercised on June 31st (business day prior to ex-dividend date)]: +1.1%
= +$330.35/$29,077.95
Annualized Return (If option exercised early): +69.1%
= (+$330.35/$29,077.95)*(365/6 days); OR
2. Absolute Return (If JPM assigned at $55.00 at Jul2016 expiration): +2.0%
= +$570.35/$29,077.95
Annualized Return: +37.7%
= (+$570.35/$29,077.95)*(365/19 days)
Either outcome provides a very attractive return-on-investment result for this investment. These returns will be achieved as long as the stock is above the $55.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $53.82 ($58.14 -$3.84 -$.48) provides 7.4% downside protection below today's purchase price.
The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy. The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved. As shown in the table below, ten of the eleven criteria are achieved for this JPMorgan position.
4. S&P 500 ETF (SPY) -- New 100% Cash-Secured Puts Position
06/27/2016 Sold 3 SPY Jul2016 $192.50 100% cash-secured Put options @ $1.86
Note: the price of SPY was $199.75 today when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $57,750.00
= $192.50*300
Net Profit:
(a) Options Income: +$547.80
= ($1.86*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SPY is above $192.50 strike price at Jul2016 expiration): +$0.00
= ($192.50-$192.50)*300 shares
Total Net Profit (If SPY is above $192.50 strike price at Jul2016 options expiration): +$547.80
= (+$547.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If SPY is above $192.50 strike price at Jul2016 options expiration): +0.9%
= +$547.80/$57,750.00
Annualized Return: +19.8%
= (+$547.80/$57,750.00)*(365/19 days)
The downside 'breakeven price' at expiration is at $190.64 ($192.50 - $1.86), which is 4.6% below the current market price of $199.75.
The 'crossover price' at expiration is $201.61 ($199.75 + $1.86). This is the price above which it would have been more profitable to buy-and-hold SPY until the Jul2016 options expiration date rather than selling these Put options.
