The Implied Volatility of these options was 35.0 when this position was established and the open interest was 756 contracts. There is an upcoming ex-dividend of $.23 next Tuesday (January 2nd) which is included in the analysis below.
As detailed below, a potential outcome for this investment is +2.2% absolute return-on-investment for the next 23 days (equivalent to +34.1% on an annualized return basis) if Gap stock closes above the $33.00 strike price on the January 19th options expiration date.
Gap Inc. (GPS) -- New Covered Calls Position
The transactions were:
12/28/2017 Bought 500 shares of Gap stock @ $34.23 per share
12/28/2017 Sold 5 Gap Jan 19th, 2018 $33.00 Call options @ $1.71 per share
Note: this was a simultaneous Buy/Write transaction
01/02/2018 Upcoming ex-dividend of $.23 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,268.30
= ($34.23 - $1.71)* 500 shares + $8.30 commission
Net Profit Components:
(a) Options Income: +$855.00
= ($1.71* 500 shares)
(b) Dividend Income: +$115.00
= $.23 per share * 500 shares
(c) Capital Appreciation (If GPS is above $33.00 strike price at Jan 19th expiration): -$619.95
= ($33.00 -$34.23)* 500 shares - $4.95 commission
Potential Total Net Profit (If assigned at expiration): +$350.05
= (+$855.00 options income +$115.00 dividend income -$619.95 capital appreciation)
Absolute Return: +2.2%
= +$350.05/$16,268.30
Equivalent Annualized Return: +34.1%
= (+$350.05/$16,268.30)*(365/23 days)
The downside 'breakeven price' at expiration is at $32.29 ($34.23 - $1.71 - $.23), which is 5.7% below the current market price of $34.23. This is substantial protection given the relatively high +34.1% potential annualized ROI for this investment.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the January 19th, 2018 options expiration) for this Gap Covered Calls position is 67.2%, so the expected value annualized ROI of this investment (if held until expiration) is +22.9% (+34.1% * 67.2%), a nice expected value result for this moderately in-the-money Covered Calls position.
