As detailed below, the potential returns are:
- Micron Technology Inc. -- +2.1% absolute return in 26 days (equivalent to a +29.3% annualized return-on-investment).
- Voya Financial Inc. -- +1.7% absolute return in 26 days (equivalent to a +23.5% annualized return-on-investment).
- Both of these positions exceed the Covered Calls Advisor's desired threshold of >20% returns.
1. Micron Technology Inc. (MU) -- New Covered Calls Position
The implied volatility of the Call options was 40.3 when this position was established.
The transactions were as follows:
08/21/2017 Bought 600 shares of Micron @ $29.71
08/21/2017 Sold 6 MU Sept 15, 2017 $28.00 Call options @ $2.29
Note: this was a simultaneous Buy/Write transaction
A possible overall performance result (including commissions) would be as follows:
Cost Basis: $16,460.97
= ($29.71 - $2.29)* 600 shares + $8.97 commission
Net Profit:
(a) Options Income: +$1,374.00
= ($2.29* 600 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron is above $28.00 strike price at Sept 15th expiration): -$1,030.95
= ($28.00-$29.71)* 600 shares - $4.95 commission
Total Net Profit (If MU stock price is above $28.00 strike price at Sept 15th options expiration): +$343.05
= (+$1,374.00 options income +$0.00 dividend income -$1,030.95 capital appreciation)
Absolute Return: +2.1%
= +$343.05/$16,460.97
Annualized Return: +29.3%
= (+$343.05/$16,460.97)*(365/26 days)
The downside 'breakeven price' at expiration is at $27.42 ($29.71 - $2.29), which is 7.7% below the current market price of $29.71.
The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Micron Technology Covered Calls position is 72.6%. This compares with a probability of profit of 50.2% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 72.6%, the expected value annualized return-on-investment (if held until expiration) is +21.3% (+29.3% * 72.6%), a satisfactory risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $32.00 ($29.71 + $2.29). This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the Sept 15th, 2017 options expiration date.
2. Voya Financial Inc. (VOYA) -- New Covered Calls Position
The implied volatility of the Call options was 23.9 when this position was established; so the $1.54 per share received is a nice premium received for these in-the-money (i.e. strike price below the current stock price) Call options.
The transactions were as follows:
08/21/2017 Bought 300 shares VOYA @ $36.94
08/21/2017 Sold 3 VOYA Sept 15, 2017 $36.00 Call options @ $1.54
Note: this was a simultaneous Buy/Write transaction
08/29/2017 Upcoming $.01 per share ex-dividend
A possible overall performance result (including commissions) would be as follows:
Cost Basis: $10,626.96
= ($36.94 - $1.54)*300 shares + $6.96 commission
Net Profit:
(a) Options Income: +$462.00
= ($1.54*300 shares)
(b) Dividend Income: +$3.00 = $.01 dividend x 300 shares
(c) Capital Appreciation (If VOYA is above $36.00 strike price at Sept 15th expiration): -$286.95
= ($36.00-$36.94)*300 shares - $4.95 commission
Total Net Profit (If VOYA stock price is above $36.00 strike price at Sept 15th options expiration): +$178.05
= (+$462.00 options income +$3.00 dividend income -$286.95 capital appreciation)
Absolute Return: +1.7%
= +$178.05/$10,626.96
Annualized Return: +24.2%
= (+$178.05/$10,626.96)*(365/26 days)
The downside 'breakeven price' at expiration is at $35.41 ($36.96 - $.01 - $1.54), which is 4.1% below the current market price of $36.94.
The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Voya Covered Calls position is 66.4%. This compares with a probability of profit of 50.3% for a buy-and-hold of VOYA shares over the same time period. Using this probability of profit of 66.4%, the expected value annualized return-on-investment (if held until expiration) is +16.1% (+24.2% * 66.4%), a satisfactory risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $38.47 ($36.94 - $.01 + $1.54). This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the Sept 15th, 2017 options expiration date instead of holding this Covered Calls position.
