The Implied Volatility of the Dec 15th $31.00 Call options was 38.2 when this position was established. This is much higher than the average Historic Volatility for Sinclair so far this year, so selling these Call options premiums at this time seems very advantageous, especially since there is no quarterly earnings report prior to expiration. There is an upcoming ex-dividend of $.18 this Thursday (Nov. 30th) which is included in the analysis below.
Sinclair is 'Buy'-rated by Reuters -- the highest of their five rating categories. To put that in perspective, of the Analysts' consensus ratings reported by Reuters (7 Analysts currently follow SBGI), only 5.9% of 3,593 optionable stocks are now 'Buy'-rated.
As detailed below, a potential outcome for this investment is +1.9% absolute return-on-investment for the next 18 days (equivalent to +37.8% on an annualized return basis) if the stock closes above the $31.00 strike price on the December 15th options expiration date.
Sinclair Broadcast Group, Inc. (SBGI) -- New Covered Calls Position
11/28/2017 Bought 500 shares of Sinclair stock @ $32.55 per share
11/28/2017 Sold 5 Sinclair Dec 15th, 2017 $31.00 Call options @ $1.95 per share
Note: this was a simultaneous Buy/Write transaction
11/30 Upcoming ex-dividend of $.18 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $15,308.30
= ($32.55 - $1.95)* 500 shares + $8.30 commission
Net Profit Components:
(a) Options Income: +$975.00
= ($1.95* 500 shares)
(b) Dividend Income: +$90.00
= $.18 per share * 500 shares
(c) Capital Appreciation (If SBGI is above $31.00 strike price at Dec 15th expiration): -$779.95
= ($31.00 -$32.55)* 500 shares - $4.95 commission
Potential Total Net Profit (If assigned at expiration): +$285.05
= (+$975.00 options income +$90.00 dividend income -$779.95 capital appreciation)
Absolute Return: +1.9%
= +$285.05/$15,308.30
Equivalent Annualized Return: +37.8%
= (+$285.05/$15,308.30)*(365/18 days)
The downside 'breakeven price' at expiration is at $30.42 ($32.55 - $1.95 - $.18), which is 6.5% below the current market price of $32.55. This is substantial protection given the relatively high +37.8% potential annualized ROI for this investment.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the December 15th, 2017 options expiration) for this Sinclair Covered Calls position is 72.3%, so the expected value annualized ROI of this investment (if held until expiration) is +27.4% (+37.8% * 72.4%), a nice expected value result for this moderately in-the-money Covered Calls position.
