Today, three Covered Calls positions were established in JPMorgan Chase & Co. (ticker symbol JPM), Las Vegas Sands Corp. (LVS), and Western Digital Corp. (WDC). The October 20th, 2017 options expiration was chosen for all three positions. Given the Covered Calls Advisor's current cautious overall market outlook, moderately in-the-money Covered Calls positions were established in each instance. Also, there are upcoming ex-dividend dates prior to options expiration for all three companies and this is taken into consideration in the details presented below.
Some potential return-on-investment results for each position are:
- JPMorgan Chase & Co. -- A +2.6% absolute
return in 46 days (equivalent to a +20.3% annualized
return-on-investment if assigned at the October 20th expiration; or a +2.0% absolute return in 28 days (equivalent to a +25.7% annualized return if assigned the day prior to the October 3rd ex-dividend date).
- Las Vegas Sands Corp. -- A +2.6% absolute
return in 46 days (equivalent to a +20.8% annualized
return-on-investment if assigned at expiration); or a +1.4% absolute return in 15 days (equivalent to a +33.9% annualized return if assigned the day prior to the September 20th ex-dividend date).
- Western Digital Corp. -- A +3.57% absolute
return in 46 days (equivalent to a +28.3% annualized
return-on-investment if assigned at expiration); or a +2.96% absolute
return in 23 days (equivalent to a +47.0% annualized return if assigned
the day prior to the September 28th ex-dividend date).
Detailed transactions and possible results for each position are provided below.
1. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend is expected to occur on October 3rd for $.50. If the
current time value (i.e. extrinsic value) of $1.73 [$3.49 option premium -
($89.26 stock price - $87.50 strike price)] remaining in the short Call
options decays substantially (down to about $.15 or less) by October 2nd (the business day prior to the ex-dividend date), there is
a possibility that the Call options owner would exercise early and
therefore call the 300 JPM shares away to capture the dividend payment.
The transactions were:
09/05/2017 Bought 300 JPM shares @ $89.26
09/05/2017 Sold 3 JPM October 20th, 2017 $87.50 Call options @ $3.49
Note: a simultaneous buy/write transaction was executed.
10/03/2017 Upcoming quarterly ex-dividend of $.50 per share
Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost Basis: $25,735.95
= ($89.26 - $3.49) * 300 shares +$4.95 commission
Net Profit:
(a) Options Income: +$1,040.04
= ($3.49*300 shares) - $6.96 commissions
(b) Dividend Income (If option exercised early on Oct 2nd, the business day prior to Oct 3rd ex-div date): +$0.00;
or
(b) Dividend Income (If JPM assigned at October 20th, 2017 expiration): +$150.00
= ($.50 dividend per share x 300 shares)
(c) Capital Appreciation (If JPM assigned): -$532.95
+($87.50-$89.26)*300 - $4.95 commission
1. Total Net Profit [If option exercised on Oct 2nd (business day prior to Oct 3rd ex-dividend date)]: +$507.09
= (+$1,040.04 +$0.00 -$532.95); or
2. Total Net Profit (If JPM assigned at $87.50 at Oct 20, 2017 expiration): +$657.09
= (+$1,040.04 +$150.00 -$532.95)
1. Absolute Return [If option exercised on Oct 2nd, 2017 (business day prior to ex-dividend date)]: +2.0%
= +$507.09/$25,735.95
Annualized Return (If option exercised early): +25.7%
= (+$507.09/$25,735.95)*(365/28 days); or
2. Absolute Return (If JPM assigned at $87.50 at Oct 20th, 2017 expiration): +2.6%
= +$657.09/$25,735.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +20.3%
= (+$657.09/$25,735.95)*(365/46 days)
Either
outcome provides a satisfactory return-on-investment result for this
investment. These returns will be achieved as long as the stock is
above the $87.50 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $85.27 ($89.26 -$3.49 -$.50)
provides 4.5% downside protection below today's $89.26 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 desired to establish a position is that at least nine of these eleven criteria must be achieved. As shown in the table below, nine of the eleven criteria are achieved for this JPMorgan position.
2. Las Vegas Sands Corp (LVS) -- New Covered Calls Position
As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its synthetically equivalent short Cash-Secured Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position". Las Vegas Sands next quarterly earnings report is after the October 20, 2017 options expiration date.
Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet". This means that LVS will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a Covered Calls position for Las Vegas Sands.
The Covered Calls Advisor has established a set of eleven criteria to
evaluate potential Covered Calls using a dividend capture strategy. The
minimum threshold desired to establish a position is that at least nine
of these eleven criteria must be achieved. As shown in the table below, all eleven criteria are achieved for this Las Vegas Sands position.
For this position, the downside 'breakeven price' at expiration is at $58.43 ($61.90 - $2.74 -$.73), which is 5.6% below the current market price of $61.90.
Using the Black-Scholes Options Pricing Model, the probability of
making a profit (if held until the October 20th, 2017 options expiration) for
this Las Vegas Sands Covered Calls position is 65.1%, so the expected value annualized
ROI of this investment (if held until expiration) is +13.5% (+20.8% *
65.1%), a satisfactory result for this moderately in-the-money Covered Calls position.
The 'crossover price' at expiration is $63.91 ($61.90 + $2.74 -$.73). This is the price above which it would have been more profitable to simply buy-and-hold LVS stock until October 20th (the October monthly options expiration date) rather than establishing this Covered Calls position.
3. Western Digital Corporation (WDC) -- New Covered Calls Position
The $.50 ex-dividend upcoming on September 28th is included in the potential results analysis below. Although unlikely, if the current time value (i.e. extrinsic value) of $2.47 [$6.32 option premium - ($88.85 stock price - $85.00 strike price)] remaining in the short Call options decay well below (probably about $.10 or less) the upcoming $.50 dividend payment by Sept 27th (the business day prior to the ex-div date), then it is possible that the Call options owner would exercise early and call the Western Digital shares away to capture the dividend.
As shown in the chart below, a Covered Calls positions was established
since the potential return-on-investment results are preferable in
comparison to its synthetically equivalent short Cash-Secured Put
options position in this instance:
In
this instance, early assignment provides a higher annualized return,
so early assignment is preferable; but either
outcome would provide a very attractive return-on-investment result for this
investment. These returns will be achieved as long as the stock is
above the $85.00 strike price at assignment. If the stock declines
below the strike price at expiration, the breakeven price of $82.03 ($88.85 -$6.32 -$.50)
provides 7.7% downside protection below today's $88.85 purchase
price.
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 Western Digital Corporation position, all eleven criteria were achieved.
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