Today, a Covered Calls position was established in Delta Air Lines (DAL) for the March 16th, 2018 options expiration date. Given the Covered Calls Advisor's current neutral overall market outlook, a moderately in-the-money position was established. Also, although the next quarterly ex-dividend has not yet been declared, it is likely that a $.305 ex-dividend will be announced very soon with an ex-dividend date of February 21st likely, and this expectation is included in the calculations below.
Two potential return-on-investment results are (1) a +2.38% absolute
return in 28 days (equivalent to a +30.0% annualized
return-on-investment) if assigned early on the day prior to the ex-dividend date; or (2) a +2.92% absolute
return in 53 days (equivalent to a +20.1% annualized
return-on-investment) if assigned at expiration.
Details for the Delta Air Lines position are provided below to explain the position further for those readers interested in understanding the type of thought processes and calculations underlying establishing this Covered Calls position.
Delta Air Lines Inc. (DAL) -- New Covered Calls Position
First and foremost, is is essential to invest only in companies that you are bullish about. Delta meets the Covered Calls Advisor's key quality, value, and growth metrics. My bullish sentiment is shared by many respected analysts including their highest rating category by Argus, CFRA, and the Average Analysts' Ratings as reported by Reuters. Delta is one of only 4 companies that have already reported quarterly earnings within the past month and is currently also rated 'Buy' by Reuters. Of the 18 analysts following Delta and tracked by Reuters, all 18 currently have either a Buy or Outperform rating on Delta. Also, as shown below, the potential rate-of-return meets the Covered Calls Advisor's desired threshold of +20% annualized return if assigned at expiration. Also positive is Delta's industry-high annual dividend yield of 2.1%.
Because of Put/Call parity, Covered Calls and Cash-Secured Puts are synthetically equivalent strategies (when done at the same strike price for the same expiration date). However, subtle and temporary differences often exist, so just prior to executing the transactions, a comparison is made to see which strategy provides a better potential return. For Delta, the chart below shows that the potential annualized return of +20.1% at expiration for the Covered Calls position is preferable to the +17.6% for a comparable 100% Cash-Secured Puts position in this instance:
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". The "NO" in this case means that Delta does not have a quarterly earnings report prior
to the options expiration.
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 Delta
will go ex-dividend sometime between today and the March 16th, 2018 options expiration
date and the Covered Calls Advisor's Dividend Capture Strategy
spreadsheet should be completed to assess whether the pre-determined
criteria are met to justify establishing a covered calls position for
Delta. 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 Delta Air Lines Inc.
position.
The detailed transactions and calculations are as follows:
01/23/2018 Bought 400 Delta Air Lines Inc. shares @ $59.63
01/23/2018 Sold 4 DAL Mar 16, 2018 $57.50 Call options @ $3.48
The Call options Open Interest was 7,772 contracts when this position was established and their Implied Volatility was 25.5
Note: this was a simultaneous buy/write transaction.
02/21/2018 Expected $.305 ex-dividend
Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 400 shares DAL: $22,067.63
= ($58.63 -$3.48)*400 shares + $7.63 commissions
Net Profit Components:
(a) Options Income: +$1,392.00
= ($3.48*400 shares)
(b) Dividend Income (If Delta shares assigned early on day prior to ex-div date): +0.00; OR
(b) Dividend Income (If Delta shares assigned on Mar 16th options expiration date): $122.00
= $.305 per share x 400 shares
(c) Capital Appreciation (If DAL Calls exercised early
or if exercised at Mar 16th options expiration date): -$856.95
= ($57.50-$59.63)*400 shares - $4.95 commissions
Total Net Profit:
(a) If DAL Calls exercised early on day prior to ex-div date: +$535.05
= (+$1,392.00 options income +$0.00 dividends -$856.95 capital appreciation); OR
(b) If Delta shares assigned on Mar 16th options expiration date: +$657.05
= (+$1,392.00 options income +$122.00 dividends -$856.95 capital appreciation)
Potential Return-on-Investment Results:
(a) If Delta shares assigned early on day prior to ex-div date:
Absolute Return: +2.4%
= +$535.05/$22,067.63
Annualized Return: +30.0%
= (+$535.05/$22,067.63)*(365/28 days); OR
(b) If Delta shares assigned on Mar 16th options expiration date:
Absolute Return: +2.92%
= +$657.05/$22,067.63
Annualized Return: +20.1%
= (+$657.05/$22,067.63)*(365/53 days)
The downside 'breakeven price' at expiration is at $54.845 ($58.63 - $3.48 -$.305), which is 6.5% below the current market price of $58.63.
Using the Black-Scholes Options Pricing Model, the probability of
making a profit (if held until the Mar 16th, 2018 options expiration) for
this Delta Air Lines covered calls position is 65.4%, so the expected value annualized
ROI of this investment (if held until expiration) is +13.1% (+20.1% *
65.4%), a satisfactory result for this moderately in-the-money Covered Calls position.
