Established Covered Calls in General Motors Co. and Magna International Inc.

Today, two new covered calls positions were established in General Motors Co. (ticker symbol GM) and Magna International Inc. (ticker MGA), both with Mar2017 expirations.  Both positions have upcoming quarterly ex-dividends on March 8th, so the potential returns for these positions detailed below includes the possibility of early exercise because of these ex-dividends prior to the March 17th options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, in-the-money covered calls were established. 

As detailed below, potential return-on-investment results for these positions are: 
1. General Motors:

If Early Assignment: +0.8% absolute return (equivalent to +33.6% annualized return for the next 9 days) if the stock is assigned early (business day prior to Mar 8th ex-date); OR

If Dividend Capture: +1.9% absolute return (equivalent to +37.7% annualized return over the next 18 days) if the stock is assigned at the Mar2017 expiration on March 17th.
2.  Magna International Inc.:

If Early Assignment: +0.8% absolute return (equivalent to +31.6% annualized return for the next 9 days) if the stock is assigned early (business day prior to Mar 8th ex-date); OR

If Dividend Capture: +1.4% absolute return (equivalent to +28.6% annualized return over the next 18 days) if the stock is assigned at the Mar2017 expiration on March 17th. 


1. General Motors Co. (GM) -- New Covered Calls Position

The $.38 dividend of Mar 8th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.32 [$1.22 option premium - ($36.90 stock price - $36.00 strike price)] remaining in the short call option decays to about $.10 or less by March 7th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the General Motors shares away to capture the dividend.

The transactions were:
02/28/2017 Bought 1,000 GM shares @ $36.90
02/28/2017 Sold 10 GM Mar2017 $36.00 Call options @ $1.22
Note: a simultaneous buy/write transaction was executed.
03/08/2017 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this General Motors covered calls position are as follows:
Stock Purchase Cost: $36,906.95
= ($36.90*1,000+$6.95 commission)

Net Profit:
(a) Options Income: +$1,213.00
= ($1.22*1,000 shares) - $7.00 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 8th ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at Mar2017 expiration): +$380.00
= ($.38 dividend per share x 1,000 shares)

(c) Capital Appreciation (If GM assigned early on Mar 7th): -$906.95
+($36.00-$36.90)*1,000 - $6.95 commissions; or
(c) Capital Appreciation (If GM assigned at $36.00 at Mar2017 expiration): -$906.95
+($36.00-$36.90)*1,000 - $6.95 commissions

Total Net Profit (If option exercised on day prior to Mar 8th ex-dividend date): +$306.05

= (+$1,213.00 +$0.00 -$906.95); or

Total Net Profit (If GM assigned at $36.00 at Mar2016 expiration): +$686.05

= (+$1,213.00 +$380.00 -$906.95)

1. Absolute Return [If option exercised on Mar 7th (business day prior to ex-dividend date)]: +0.8%

= +$306.05/$36,906.95

Annualized Return (If option exercised early): +33.6%

= (+$306.05/$36,906.95)*(365/9 days); OR

2. Absolute Return (If GM assigned at $36.00 at Mar2017 expiration): +1.9%

= +$686.05/$36,905.95

Annualized Return: +37.7%

= (+$686.05/$36,905.95)*(365/18 days)

In this instance, assignment at Mar2017 options expiration provides a slightly higher annualized return, so that outcome is preferable -- but either outcome would provide a very good return-on-investment result.  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 at expiration, the breakeven price of $35.30 ($36.90 -$.38 -$1.22) provides 4.3% downside protection below today's purchase price.

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 17th, 2017 options expiration) for this GM position is 68.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of this GM stock over the same time period. Using this probability of profit of 68.5%, the expected value annualized return-on-investment (if held until expiration) is +25.8% (+37.7% maximum potential annualized return on investment * 68.5%), a very attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $37.74 ($36.90 - $.38 + $1.22).  This is the price above which it would have been more profitable to simply buy-and-hold GM stock until the Mar2017 options expiration date rather than selling these Put options.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a potential for dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this General Motors position, ten of eleven criteria were achieved.

2. Magna International Inc. (MGA) -- New Covered Calls Position

The $.275 dividend of Mar 8th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.36 [$1.35 option premium - ($43.49 stock price - $42.50 strike price)] remaining in the short call option decays to about $.10 or less by March 7th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Magna shares away to capture the dividend.

The transactions were:
02/28/2017 Bought 500 MGA shares @ $43.49
02/28/2017 Sold 5 MGA Mar2017 $42.50 Call options @ $1.35
Note: a simultaneous buy/write transaction was executed.
03/08/2016 Upcoming ex-dividend of $.275 per share

Two possible overall performance results (including commissions) for this Magna International covered calls position are as follows:
Stock Purchase Cost: $21,751.95
= ($43.49*500+$6.95 commission)

Net Profit:
(a) Options Income: +$671.50
= ($1.35*500 shares) - $3.50 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 8th ex-div date): +$0.00; or
(b) Dividend Income (If MGA assigned at Mar2017 expiration): +$137.50
= ($.275 dividend per share x 500 shares)

(c) Capital Appreciation (If MGA assigned early on Mar 7th): -$501.95
+($42.50-$43.49)*500 - $6.95 commissions; or
(c) Capital Appreciation (If MGA assigned at $42.50 at Mar2017 expiration): -$501.95
+($42.50-$43.49)*500 - $6.95 commissions

Total Net Profit (If option exercised on day prior to Mar 8th ex-dividend date): +$169.55

= (+$671.50 +$0.00 -$501.95); or

Total Net Profit (If MGA assigned at $42.50 at Mar2017 expiration): +$307.05

= (+$671.50 +$137.50 -$501.95)

1. Absolute Return [If option exercised on Mar 7th (business day prior to ex-dividend date)]: +0.8%
= +$169.55/$21,751.95

Annualized Return (If option exercised early): +31.6%

= (+$169.55/$21,751.95)*(365/9 days); OR

2. Absolute Return (If MGA assigned at $42.50 at Mar2017 expiration): +1.4%

= +$307.05/$21,751.95

Annualized Return: +28.6%

= (+$307.05/$21,751.95)*(365/18 days)

In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a good return-on-investment result.  These returns will be achieved as long as the stock is above the $42.50 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $41.865 ($43.49 -$.275 -$1.35) provides 3.7% downside protection below today's purchase price.

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 17th, 2017 options expiration) for this Magna position is 68.4%. This compares with a probability of profit of 50.2% for a buy-and-hold of this MGA stock over the same time period. Using this probability of profit of 68.4%, the expected value annualized return-on-investment (if held until expiration) is +19.6% (+28.6% maximum potential annualized return on investment * 68.4%), a nice risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $44.565 ($43.49 - $.275 + $1.35).  This is the price above which it would have been more profitable to simply buy-and-hold MGA stock until the Mar2017 options expiration date rather than selling these Put options.


The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments 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 detailed below, for this Magna position, all eleven criteria were achieved.