There is potential for a +1.5% absolute return in 18 days (equivalent to a +30.2% annualized return-on-investment). This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks. Although a dividend will not be declared for a few days, it is likely that a dividend at least equal to that of prior quarters of $.2025 is expected to go ex-dividend on about August 15th; so this dividend is included in the potential return-on-investment result detailed below.
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
08/01/2017 Bought 500 Delta Air Lines Inc. shares @ $49.97
08/01/2017 Sold 5 DAL Aug 18, 2017 $49.00 Call options @ $1.50
Note: this was a simultaneous buy/write transaction.
08/15/2017 $.2025 ex-dividend
A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares DAL: $24,243.30
= ($49.97 -$1.50)*500 + $8.30 commissions
Net Profit:
(a) Options Income: +$750.00
= ($1.50*500 shares)
(b) Dividend Income: +$101.25
= $.2025 per share x 500 shares
(c) Capital Appreciation (If DAL is above $49.00 strike price at Aug 18th expiration): -$489.95
= ($49.00-$49.97)*500 shares - $4.95 commissions
Total Net Profit (If DAL is above $49.00 strike price at Aug 18, 2017 options expiration): +$361.30
= (+$750.00 options income +$101.25 dividends -$489.95 capital appreciation)
Absolute Return: +1.5%
= +$361.30/$24,243.30
Annualized Return: +30.2%
= (+$361.30/$10,829.95)*(365/18 days)
The downside 'breakeven price' at expiration is at $48.2675 ($49.97 - $1.50 -$.2025), which is 3.4% below the current market price of $49.97.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Delta Air Lines covered calls position is 66.9%, so the expected value annualized ROI of this investment (if held until expiration) is +20.2% (+30.2% * 66.9%), a very attractive result for this in-the-money covered calls position.
The 'crossover price' at expiration is $51.2675 ($49.97 + $1.50 -$.2025). This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.
