Continuation of Covered Calls Position in Devon Energy Corp.

Upon the October 20th, 2017 options expiration, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $35.00 strike price.  So, the October Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when both the prices of crude oil and also Devon stock had risen by more than 2.0%, a sell-to-open order was executed to sell 5 November 17th, 2017 Call options at the $36.00 strike price for $.93 per share to continue the Devon Covered Calls position.

As detailed below, a potential return-on-investment for this Devon Energy position is +11.5% absolute return in 146 days (equivalent to a +28.8% annualized return-on-investment).  

Devon Energy Corp. (DVN) -- Continuation Covered Calls Position

The transactions were as follows:
05/25/2017  Bought 500 Devon Energy Corp. shares @ $37.45
05/25/2017 Sold 5 DVN June 16, 2017 $36.00 Call options @ $2.10
Note: this was a simultaneous buy/write transaction.
06/13/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
06/16/2017 5 DVN June 16th, 2017 Call options expired
Note: the price of DVN stock closed at $31.76 upon the June 16th options expiration date.
07/03/2017 Sold 5 DVN July 21, 2017 $33.00 Call options @ $.87 per share
07/21/2017 5 DVN Call options expired
07/26/2017 Sold 5 DVN Aug 18, 2017 $35.00 Call options @ $.65 per share
08/18/2017 5 DVN Call options expired
Note: the price of DVN stock was $30.40 upon expiration of the Aug 18th Call options
09/14/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
09/14/2017 Sold 5 DVN October 20th, 2017 $35.00 Call options @ $.89 per share
Note: the price of DVN stock was $34.12 today when the Oct 20th Call options were sold
10/20/2017 5 DVN Call options expired
Note: the price of DVN stock was $34.92 upon expiration of the Oct 20th Call options
10/27/2017 Sold 5 DVN November 17th, 2017 $36.00 Call options @ $.93 per share
Note: the price of DVN stock was $35.66 today when the Nov 17th Call options were sold

A possible overall performance result (including commissions) would be as follows:
Cost Basis of Purchase of 500 shares DVN: $17,679.95
= ($37.45 - $2.10)*500 + $4.95 commission

Net Profit Components:
(a) Options Income: +$2,703.25
= ($2.10 + $.87 + $.65 + $.89 +$.93) *500 shares - 5*$3.35 commissions
(b) Dividend Income: +$60.00
= ($.06 + $.06) * 500 shares
(c) Capital Appreciation (If DVN is above $36.00 strike price at the Nov 17th, 2017 expiration): -$729.95
= ($36.00-$37.45)*500 shares - $4.95 commissions

Total Net Profit (If DVN stock is above $36.00 strike price at Nov 17, 2017 options expiration): +$2,033.30
= (+$2,703.25 options income +$60.00 dividends -$729.95 capital appreciation)

Absolute Return: +11.5%
= +$2,033.30/$17,679.95
Annualized Return: +28.8%
= (+$2,033.30/$17,679.95)*(365/146 days)

New Covered Calls in Best Buy Inc.

Today, a new Covered Calls positions was entered in Best Buy Inc. (ticker BBY) for the November 17th, 2017 options expiration and at the $52.50 strike price when the stock was at $55.11.  Based on the Covered Calls Advisor's current Neutral sentiment, a moderately in-the-money position was established.

As detailed below, a potential return-on-investment is +3.2% absolute return in 24 days (equivalent to a +48.0% annualized return-on-investment).  


Best Buy Inc. (BBY) -- New Covered Calls Position
The implied volatility of the Call options was a very high 50.2 when this position was established.  Much of this elevated level is attributable to the upcoming earnings report on Nov. 16th, the day prior to the options expiration date.  This position will be tracked closely and it is possible that it will be closed out prior to the earnings report because of the high uncertainty associated with the stock price movement immediately after the earnings release.

The transactions were as follows:
10/25/2017 Bought 400 shares of Best Buy stock @ $55.11 per share 
10/25/2017 Sold 4 Best Buy November 17th, 2017 $52.50 Call options @ $4.23 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $20,359.63
= ($55.11 - $4.23)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$1,692.00
= ($4.23* 400 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BBY stock is above $52.50 strike price at Nov 17th expiration): -$1,048.95
= ($52.50 -$55.11)* 400 shares - $4.95 commission

Total Net Profit: +$643.05
= (+$1,692.00 options income +$0.00 dividend income -$1,048.95 capital appreciation)

Absolute Return: +3.2%
= +$643.05/$20,359.63
Equivalent Annualized Return: +48.0%
= (+$643.05/$20,359.63)*(365/24 days)

The downside 'breakeven price' at expiration is at $50.88 ($55.11 - $4.23), which is 7.7% below the current market price of $55.11.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this Best Buy Covered Calls position is 66.6%, so the expected value annualized ROI of this investment (if held until expiration) is +32.0% (+48.0% * 66.6%), a very good result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $59.34 ($55.11 + $4.23).  This is the price above which it would have been more profitable to buy-and-hold Best Buy stock until the November 17th, 2017 options expiration date.

Covered Calls Established in Alibaba Group Holding Ltd. and Citigroup Inc.

Today, two new Covered Calls positions were entered in Alibaba Group Holding Ltd. (ticker BABA) and Citigroup Inc. (ticker C).   Both positions were established for the November 17th, 2017 options expiration date and given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, in-the-money positions were taken.

As detailed below, the potential return-on-investments are:

• Alibaba Group:  A +2.2% absolute return in 26 days (equivalent to a +31.2% annualized return-on-investment); and
• Citigroup Inc.:  A +1.4% absolute return in 26 days (equivalent to a +19.9% annualized return-on-investment) 

The transactions and potential results are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position

The implied volatility of the Call options was 39.5 when this position was established.  This is a very high level which in large part is due to the uncertainty associated with the upcoming earnings report on Nov 2nd and its annual Singles Day sale on Nov 11th.

The transactions were as follows:
10/23/2017 Bought 300 shares of Alibaba stock @ $174.13 per share 
10/23/2017 Sold 3 Alibaba November 17th, 2017 $165.00 Call options @ $12.73 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $48,426.96
= ($174.13 - $12.73)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$3,819.00
= ($12.73* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $165.00 strike price at Nov 17th expiration): -$2,743.95
= ($165.00 -$174.13)* 300 shares - $4.95 commission

Total Net Profit: +$1,075.05
= (+$3,819.00 options income +$0.00 dividend income -$2,743.95 capital appreciation)

Absolute Return: +2.2%
= +$1,075.05/$48,426.96
Equivalent Annualized Return: +31.2%
= (+$1,075.05/$48,426.96)*(365/26 days)

The downside 'breakeven price' at expiration is at $161.40 ($174.13 - $12.73), which is 7.3% below the current market price of $174.13.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this Alibaba Covered Calls position is 71.3%, so the expected value annualized ROI of this investment (if held until expiration) is +22.2% (+31.2% * 71.3%), a nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $186.86 ($174.13 + $12.73).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the October 20th, 2017 options expiration date.


2. Citigroup Inc.(C) -- New Covered Calls Position

The implied volatility of the Call options was 16.5 when this position was established.  There is no intervening earnings report prior to expiration.  There is an upcoming ex-dividend of $.32 on November 3rd which is included in the analysis below.

The transactions were as follows:
10/23/2017 Bought 400 shares of Citigroup stock @ $73.76 per share 
10/23/2017 Sold 4 Citigroup Nov 17th, 2017 $72.50 Call options @ $1.97 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $28,723.63
= ($73.76 - $1.97)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$788.00
= ($1.97* 400 shares)
(b) Dividend Income: +$128.00 = $.32 per share * 400 shares 
(c) Capital Appreciation (If Citi is above $72.50 strike price at Nov 17th expiration): -$508.95
= ($72.50 -$73.76)* 400 shares - $4.95 commission

Total Net Profit: +$407.05
= (+$788.00 options income +$128.00 dividend income -$508.95 capital appreciation)

Absolute Return: +1.4%
= +$407.05/$28,723.63
Equivalent Annualized Return: +19.9%
= (+$407.05/$28,723.63)*(365/26 days)

The downside 'breakeven price' at expiration is at $71.79 ($73.76 - $1.97), which is 2.7% below the current market price of $73.76.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this Citigroup Covered Calls position is 63.6%, so the expected value annualized ROI of this investment (if held until expiration) is +12.7% (+19.9% * 63.6%), a nice result for this in-the-money Covered Calls position.   

October 20th, 2017 Options Expiration Results

The Covered Calls Advisor Portfolio held nine positions with October 20th, 2017 options expirations.   Seven of these positions (Alibaba Group Holding Ltd., Best Buy Inc., Discover Financial Services, JPMorgan Chase & Co., Las Vegas Sands Corp., United States Steel, and Western Digital Corp.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each position:

• Alibaba Group Holding Ltd.:  +1.3% absolute return (+18.4% annualized return) in 26 days
• Best Buy Inc.:  +3.96% absolute return (+27.8% annualized return) in 52 days  
• Discover Financial Services:  +2.5% absolute return (+19.6% annualized return) in 46 days
• JPMorgan Chase & Co.:  +3.2% absolute return (+25.2% annualized return) in 46 days
• Las Vegas Sands Corp.:  +2.6% absolute return (+20.8% annualized return) in 46 days
• United States Steel:  +1.5% absolute return (+54.6% annualized return) in 10 days
• Western Digital Corp.:  +3.6% absolute return (+28.3% annualized return) in 46 days

The cash now available in the Covered Calls Advisor Portfolio from the closing of these seven positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

The remaining two positions (Devon Energy Corp. and Range Resources Corp.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see holdings in right sidebar) until either the stock is sold or a continuation Covered Calls position is established. 

As an example of how the Return-On-Investment (ROI) results (both Absolute and Annualized ROIs) are calculated, details from the Covered Calls Advisor's Alibaba position are provided below:

Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed on Oct 20th Expiration 

The transactions were as follows:
09/25/2017  Bought 200 Alibaba shares @ $169.05
09/25/2017 Sold 2 BABA October 20, 2017 $160.00 Call options @ $11.15
Note: this was a simultaneous Buy/Write transaction
10/20/2017 200 BABA shares sold at $160.00 strike price upon the Oct 20th options expiration  

The overall performance result (including commissions) was as follows:
Cost Basis: $31,586.29
= ($169.05 -$11.15) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$2,230.00
= ($11.15 *200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA was above $160.00 strike price at Oct 20, 2017 expiration): -$1,814.95
= ($160.00-$169.05)*200 shares - $4.95

Total Net Profit: +$415.05
= (+$2,230.00 options income +$0.00 dividend income -$1,814.95 capital appreciation)

Absolute Return: +1.3%
= +$415.05/$31,586.29
Annualized Return: +18.4%
= (+$415.05/$31,586.29)*(365/26 days)

Early Close of Nucor Corp. Covered Calls

Today, the Covered Calls Advisor closed out the Nucor Corp. (ticker symbol NUE) covered calls position.  This decision was made since the price of Nucor has risen quickly from the $54.16 purchase price to $57.35 today so that there was only $.05 of time value remaining in the Call options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved.  Given the stock price uncertainty inherent in tomorrow's earnings report, the Covered Calls Advisor decided to lock in the profit today.

As detailed below, the actual return-on-investment result for this closed position was a +3.1% absolute return (equivalent to +22.3% annualized return) for the 51 days holding period.  

Nucor Corp. -- Covered Calls Position is Closed

The transactions were as follows:
08/28/2017  Bought 200 Nucor Corp. shares @ $54.16
08/28/2017 Sold 2 NUE October 20, 2017 $52.50 Call options @ $2.96
Note: this was a simultaneous buy/write transaction.
09/28/2017 Ex-dividend of $.3775 per share
10/18/2017 Sold 200 Nucor Corp. shares @ $57.35 per share
10/18/2017 Bought-to-Close 2 NUE Oct 20th, 2017 $52.50 Call options @ $4.90 per share

The overall performance result (including commissions) was as follows:
Cost Basis Purchase of 200 shares NUE: $10,246.29
= ($54.16 -$2.96)*200 + $6.29 commissions

Net Profit:
(a) Options Income: -$389.34
= ($2.96 - $4.90) *200 shares - $1.34 commissions
(b) Dividend Income: +$75.50
= $.3775 per share x 200 shares
(c) Capital Appreciation: +$633.05
= ($57.35 -$54.16)*200 shares - $4.95 commissions

Total Net Profit: +$319.21
= (-$389.34 options income +$75.50 dividends +$633.05 capital appreciation)

Absolute Return: +3.1%
= +$319.21/$10,246.29
Equivalent Annualized Return: +22.3%
= (+$330.55/$10,246.29)*(365/51 days)

Covered Calls Established for CVS Health Corporation

Today, a Covered Calls positions was established in CVS Health Corporation (ticker CVS).  Given the Covered Calls Advisor's current cautious overall market outlook, a moderately in-the-money Covered Calls position was established with the November 17th, 2017 $70.00 Call options when the stock price was $72.84.  This $70.00 strike price is -0.5 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  Also, there is an upcoming $.50 ex-dividend prior to the options expiration date which is taken into consideration in the details presented below.

As detailed below, some potential return-on-investment results are:

• A +1.65% absolute return (equivalent to +60.1% annualized return for the next 10 days) if the stock is assigned early (business day prior to the October 23rd ex-div date); OR 
• A +2.37% absolute return (equivalent to +24.0% annualized return over the next 36 days) if the stock is assigned on the Nov 17th, 2017 options expiration date.

Either result exceeds the Covered Calls Advisor's target for a greater than +20% potential annualized return-on-investment.

1. CVS Health Corporation (CVS) -- 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 100% 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 "YES*" with an indication that "If 'YES' then consider avoiding position".  This position was established because of the Covered Calls Advisor's confidence that analysts' expectations that upcoming earnings per share will be achieved as well as the relatively narrow range of those estimates. 
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 CVS 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 in CVS.

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, ten of the eleven criteria are achieved for this CVS Covered Calls position.

For this position, the downside 'breakeven price' at expiration is at $68.35 ($72.84 - $3.99 -$.50), which is 6.2% below the current market price of $72.84. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this CVS Covered Calls position is 68.8%, so the expected value annualized ROI of this investment (if held until expiration) is +16.5% (+24.0% * 68.8%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $76.33 ($72.84 + $3.99 -$.50).  This is the price above which it would have been more profitable to simply buy-and-hold CVS stock until Nov 17th (the November monthly options expiration date) rather than establishing this Covered Calls position.

Covered Calls Position Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel (ticker symbol X).  This was established when the stock price was $24.69 and eight October 20th, 2017 $24.00 Calls were sold at $1.05.   U.S. Steel has 2.9% downside protection to the $24.00 strike price, a conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral. 


As detailed below, the potential return-on-investment is +1.5% absolute return in 10 days (equivalent to a +54.6% annualized return-on-investment).  


United States Steel (X) -- New Covered Calls Position

The implied volatility of the Call options was 39.5 when this position was established, a very high level considering that there is no earnings report prior to the Oct. 20th expiration date.
The transactions were as follows:
10/11/2017 Bought 800 shares of United States Steel stock @ $24.69 per share 
10/11/2017 Sold 8 US Steel October 20th, 2017 $24.00 Call options @ $1.05 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,922.31
= ($24.69 - $1.05)* 800 shares + $10.31 commission

Net Profit:
(a) Options Income: +$840.00
= ($1.05* 800 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If USS is above $24.00 strike price at Oct 20th expiration): -$556.95
= ($24.00 -$24.69)* 800 shares - $4.95 commission

Total Net Profit (If US Steel stock price is above $24.00 strike price at Oct 20th options expiration): +$283.05
= (+$840.00 options income +$0.00 dividend income -$556.95 capital appreciation)

Absolute Return: +1.5%
= +$283.05/$18,922.31
Annualized Return: +54.6%
= (+$283.05/$18,922.31)*(365/10 days)

The downside 'breakeven price' at expiration is at $23.64 ($24.69 - $1.05), which is 4.3% below the current market price of $24.69.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this U.S. Steel Covered Calls position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of US Steel shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +37.0% (+54.6% * 67.8%).  

The 'crossover price' at expiration is $25.74 ($24.69 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold US Steel stock until the October 20th, 2017 options expiration date.

Roll-Up of JPMorgan Chase & Co. Covered Calls

Today, the Covered Calls position in JPMorgan Chase & Co. was rolled up from the October 20th $87.50 strike price to the Oct 20th $95.50 strike price.  With an upcoming dividend of $.56 in two days and the stock deep in-the-money trading at $97.07 per share, there was only $.04 time value remaining in the short Call options.  Therefore, there is a strong likelihood that the stock would have been called away tomorrow by the owner of the Calls to capture the dividend.

The Covered Calls Advisor decided to roll-up to the $95.50 strike price (with $.54 time value remaining) to ensure that the dividend will be captured and that there is also a good possibility of also capturing the $.54 per share time value as additional profit as long as JPM stock is above the $95.50 strike price on the Oct. 20th expiration date.  If this occurs, the financial result would be a +3.2% absolute return in 46 days (equivalent to a +25.2% annualized return-on-investment) for this JPMorgan Chase position.  Details are provided below.
 
1. JPMorgan Chase & Co. (JPM) --  Covered Calls Roll-Up Continuation

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 Bought-to-Close 3 JPM Oct. 20th $87.50 Call options @ $9.61 per share
10/03/2017 Sold-to-Open 3 JPM Oct. 20th $95.50 Call options @ $2.11 per share
10/05/2017 Upcoming quarterly ex-dividend of $.56 per share

A possible overall performance result (including commissions) for this ongoing JPM Covered Calls position is as follows:
Stock Purchase Cost Basis: $25,735.95
= ($89.26 - $3.49) * 300 shares +$4.95 commission

Net Profit:
(a) Options Income: -$1,216.92
= ($3.49 -$9.61 +$2.11) *300 shares - 2* $6.96 commissions

(b) Dividend Income (If JPM assigned at October 20th, 2017 expiration): +$168.00
= ($.56 dividend per share x 300 shares)

(c) Capital Appreciation (If JPM assigned at $95.50 strike price): +1,867.05
+($95.50 -$89.26)*300 - $4.95 commission

Total Net Profit (If JPM assigned on Oct. 20th, 2017 at $95.50 strike price): +$818.13

= (-$1,216.92 +$168.00 +$1,867.05)

Absolute Return (If JPM assigned at $95.50 at Oct 20th, 2017 expiration): +3.2%

= +$818.13/$25,735.95

Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +25.2%

= (+$818.13/$25,735.95)*(365/46 days)