There is potential for a +3.0% absolute return in 30 days (equivalent to a +36.7% annualized return-on-investment). This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment. An upcoming ex-dividend of $.55 per share will occur on September 1st, so this dividend is included in the potential return-on-investment result detailed below.
The stock price of all big box retailers, including Kohl's, declined today in sympathy with the decline in Walmart stock after it reported decent (but not inspiring) quarterly earnings this morning. The Covered Calls Advisor believes that Kohl's current valuation relative to its primary competitors is now very attractive:
Given this relatively attractive valuation along with Kohl's upcoming generous dividend and attractive options premiums (current implied volatility of 31.0), the Covered Calls Advisor decided to establish the Covered Calls position described below. It is also noted that Kohl's already reported their earnings last week, so there will be no earnings report surprises prior to the options expiration date.
Kohl's Corporation (KSS) -- New Covered Calls Position
08/17/2017 Bought 500 Kohl's shares @ $37.02
08/17/2017 Sold 5 KSS Sept 15, 2017 $35.00 Call options @ $2.52
Note: this was a simultaneous buy/write transaction.
09/01/2017 $.55 ex-dividend
A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares KSS: $17,258.30
= ($37.02 -$2.52)*500 + $8.30 commissions
Net Profit:
(a) Options Income: +$1,260.00
= ($2.52*500 shares)
(b) Dividend Income: +$275.00
= $.55 per share x 500 shares
(c) Capital Appreciation (If KSS is above $35.00 strike price at Sept 15th expiration): -$1,014.95
= ($35.00-$37.02)*500 shares - $4.95 commissions
Total Net Profit (If KSS is above $35.00 strike price at Sept 15, 2017 options expiration): +$520.05
= (+$1,260.00 options income +$275.00 dividends -$1,014.95 capital appreciation)
Absolute Return: +3.0%
= +$520.05/$17,258.30
Annualized Return: +36.7%
= (+$520.05/$17,258.30)*(365/30 days)
The downside 'breakeven price' at expiration is at $33.95 ($37.02 - $2.52 -$.55), which is 8.3% below the current market price of $37.02.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Kohl's Corporation covered calls position is 70.6%, so the expected value annualized ROI of this investment (if held until expiration) is +25.9% (+36.7% * 70.6%), a very attractive result for this in-the-money covered calls position.
The 'crossover price' at expiration is $38.99 ($37.02 + $2.52 -$.55). This is the price above which it would have been more profitable to simply buy-and-hold Kohl's stock until September 15th (the September monthly options expiration date) rather than establishing this covered calls position.
