Covered Calls Position Established in Discover Financial Services

Today, a Covered Calls positions was established in Discover Financial Services (ticker symbol DFS).  This was established when the stock price was $58.46 and three October 20th, 2017 $57.50 Calls were sold at $2.36.   This is are relatively conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral, so Discover has 1.6% downside protection to the $57.50 strike price.

Discover is currently rated as a good value by many in the investment community.  Ratings by 24 analysts are: 9 Buys; 8 Outperforms; 6 Neutral; and 1 Underperform.  In addition, the current Discover Financial Services target price for some services I follow are well above its current $58.46 price: S&P -- $73; Argus -- $74; and Credit Suisse -- $82. 

As detailed below, the potential return-on-investment is +2.5% absolute return in 46 days (equivalent to a +19.6% annualized return-on-investment).  


Discover Financial Services (DFS) -- New Covered Calls Position

The implied volatility of the Call options was 21.7 when this position was established.
The transactions were as follows:
09/05/2017 Bought 300 shares of Discover Financial Services @ $58.46 
09/05/2017 Sold 3 DFS October 20th, 2017 $57.50 Call options @ $2.36
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,836.96
= ($58.46 - $2.36)* 300 shares + $6.96 commission

Net Profit:
(a) Options Income: +$708.00
= ($2.36* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DFS is above $57.50 strike price at Oct 20th expiration): -$292.95
= ($57.50 -$58.46)* 300 shares - $4.95 commission

Total Net Profit (If Discover stock price is above $57.50 strike price at Oct 20th options expiration): +$415.05
= (+$708.00 options income +$0.00 dividend income -$292.95 capital appreciation)

Absolute Return: +2.5%
= +$415.05/$16,836.96
Annualized Return: +19.6%
= (+$415.05/$16,836.96)*(365/46 days)

The downside 'breakeven price' at expiration is at $56.10 ($58.46 - $2.36), which is 4.0% below the current market price of $58.46.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this Discover Financial Services Covered Calls position is 59.0%. This compares with a probability of profit of 50.2% for a buy-and-hold of Discover shares over the same time period. Using this probability of profit of 59.0%, the expected value annualized return-on-investment (if held until expiration) is +11.6% (+19.6% * 59.0%).  

The 'crossover price' at expiration is $60.82 ($58.46 + $2.36).  This is the price above which it would have been more profitable to simply buy-and-hold Discover Financial Services stock until the October 20th, 2017 options expiration date.