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Tuesday, February 20, 2018

Covered Calls Positions Continued in Caterpillar Inc. and Intel Corporation

Last Friday, the February 16th, 2018 Covered Calls positions in Caterpillar Inc. (ticker symbol CAT) and Intel Corp. (ticker INTC) expired with the stock prices below their strike prices.  So, the Call options expired and their stock shares were retained in the Covered Calls Advisor's Portfolio.  This morning, the Covered Calls Advisor continued both Covered Calls positions by selling next month (March 16th, 2018) Call options against both long stock positions. 

Some potential overall return-on-investment results for each position are: 
  • Caterpillar Inc. -- A +4.4% absolute return in 47 days (equivalent to a +34.4%  annualized return if Caterpillar stock closes above the $155.00 strike price on the March 16th, 2018 expiration date.
  • Intel Corp. -- A +1.0% absolute return in 46 days (equivalent to a +7.6% annualized return if Intel stock is above the $46.00 strike price on the March 16th expiration date.
The transactions to-date and potential return-on-investment results for both positions are detailed below. 

1. Caterpillar Inc. (CAT) -- Covered Call Position Continued
The transactions are as follows:
01/29/2018 Bought 100 shares of Caterpillar stock @ $160.12 per share 
01/29/2018 Sold 1 Caterpillar February 16th, 2018 $157.50 Call option @ $5.99 per share
Note: this was a simultaneous Buy/Write transaction
02/16/2018 1 CAT March 16th Call option expired and 100 shares of CAT stock were retained in the Covered Calls Advisor Portfolio
Note: the price of CAT stock was $156.29 upon the options expiration.
02/20/2018 Continuation of CAT Covered Call position by selling 1 Mar 16th, 2018 Call option at the $155.00 strike @ $6.00 per share
Note: CAT stock was at $157.68 when this transaction occurred


A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $15,418.62
= ($160.12 - $5.99)* 100 shares + $5.62 commission

Net Profit Components:
(a) Options Income: +$1,199.00
= ($5.99 + $6.00) * 100 shares
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If CAT stock is above $155.00 strike price at Mar16th expiration): -$516.95
= ($155.00 -$160.12)* 100 shares - $4.95 commission

Total Net Profit: +$682.05
= (+$1,199.00 options income +$0.00 dividend income -$516.95 capital appreciation)

Absolute Return: +4.4%
= +$682.05/$15,418.62
Equivalent Annualized Return: +34.4%
= (+$682.05/$15,418.62)*(365/47 days)


2. Intel Corporation (INTC) -- Covered Calls Position Continued
An ex-dividend occurred on February 6th for $.30 per share. 

The transactions have been as follows:
01/30/2018 Bought 400 Intel shares @ $49.23
01/30/2018 Sold 4 Intel 02/16/2018 $47.50 Call options @ $2.04
Note: a simultaneous buy/write transaction was executed.
02/06/2018 Upcoming quarterly ex-dividend of $.30 per share
02/16/2018 4 Intel Feb. 16th Call options expired and 400 shares of Intel stock were retained in the Covered Calls Advisor Portfolio
Note: the price of Intel stock was $45.56 upon the options expiration.
02/20/2018 Continuation of Intel Covered Calls position by selling 4 Mar 16th, 2018 Call options at the $46.00 strike price @ $1.38 per share
Note: Intel stock was at $46.14 when this transaction occurred

A possible overall performance result (including commissions) for this Intel Covered Calls position is as follows:
Covered Calls Cost Basis: $18,880.95
= ($49.23 - $2.04) *400 + $4.95 commission

Net Profit Components:
(a) Options Income: +$1,357.69
= ($2.04 + $1.38) *400 shares - $10.31 commissions
(b) Dividend Income: +$120.00
= ($.30 dividend per share x 400 shares)
(c) Capital Appreciation (If INTC assigned at $46.00 strike price at Mar2018 options expiration): -$1,296.95
+($46.00 -$49.23)*400 shares - $4.95 commissions

Total Net Profit (If Intel assigned at $46.00 at March 16th, 2018 expiration): +$180.74
= (+$1,357.69 +$120.00 -$1,296.95)

Absolute Return (If Intel assigned at $46.00 at Mar 16th, 2018 expiration): +1.0%
= +$180.74/$18,880.95
Annualized Return: +7.6%
= (+$180.74/$18,880.95)*(365/46 days)

Saturday, February 17, 2018

February 16th, 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had five positions with February 16th, 2018 options expirations.  Of these, three positions (Alibaba Group Holding Ltd., Micron Technology Inc., and Valero Energy Corp.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions:
  • Alibaba Group Holding Ltd.:  +2.2% absolute return (+25.6% annualized return) in 31 days
  • Micron Technology Inc.:  +3.15% absolute return (+31.1% annualized return) in 37 days  
  • Valero Energy Corp.:  +2.4% absolute return (+54.7% annualized return) in 16 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these three 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 (Caterpillar Inc. and Intel Corporation) 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 continuation Covered Calls positions are established.  Caterpillar's strike price was $157.50 and the stock closed at yesterday's expiration at $156.29 while Intel had a $47.50 strike price and it closed at $45.56.

To show one example of how the return-on-investment results for closed Covered Calls positions are calculated, the details for one of the three assigned positions (Alibaba) is provided here:


Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed
The transactions were as follows:
01/17/2017 Bought 300 shares of Alibaba stock @ $180.09 per share 
01/17/2017 Sold 3 Alibaba February 16th, 2017 $170.00 Call options @ $13.73 per share
Note: this was a simultaneous Buy/Write transaction
02/16/2018 3 BABA Feb 16th, 2018 $170.00 Call options expired in-the-money, so 300 shares of BABA owned were sold at the $170.00 strike price, thus closing out this Covered Calls position.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $49,914.96
= ($180.09 - $13.73)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$4,119.00
= ($13.73* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (BABA stock closed above $170.00 strike price on Feb 16th expiration): -$3,031.95
= ($170.00 -$180.09)* 300 shares - $4.95 commission

Total Net Profit: +$1,087.05
= (+$4,119.00 options income +$0.00 dividend income -$3,031.95 capital appreciation)

Absolute Return: +2.2%
= +$1,087.05/$49,914.96
Equivalent Annualized Return: +25.6%
= (+$1,087.05/$49,914.96)*(365/31 days)

Tuesday, February 13, 2018

Covered Calls Established in Lam Research Corp.

Today, a Covered Calls position was established by buying 200 shares of Lam Research Corp. (ticker symbol LRCX) stock at $169.41 and selling 2 March 16th, 2018 $160.00 Call options at $13.86 -- a net debit of $155.55 per share.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.

The Implied Volatility of the March 16th $160.00 Call options was 44.5 when this position was established.  With the sharp decline in LRCX over the past few weeks, the Implied Volatility has spiked up dramatically to its highest level in more than 2 years.  Selling this Covered Call at this time seems very advantageous, especially since there is no quarterly earnings report prior to expiration.  In addition there is an upcoming ex-dividend of $.50 on March 6th which is included in the detailed analysis below.

Lam Research appeared on the Covered Calls Advisor's QVG (Quality, Value, and Growth) screener.  In addition, LRCX's trailing twelve months tax rate was 34.2%, so it will benefit substantially as a result of the significantly lower corporate tax rate in the recently passed tax bill.  Furthermore, Lam Research is either 'Buy' or 'Outperform' rated by 16 of the 17 analysts that cover its stock according to Reuters.  The Credit Suisse analyst summarized his detailed analysis this way: "We believe that the Street is missing the growth and cash return potential and is mispricing LRCX.  Its a margin protected way to play big data growth.  The company is benefiting from the 3D NAND transition and is well poised to benefit from the cyclical recovery in memory in 2018.  Company also has about 20% market cap in net cash and could return 50% market cap by 2020."

As detailed below, a potential outcome for this investment is +3.05% absolute return-on-investment for the next 32 days (equivalent to +34.7% on an annualized return basis) if the stock closes above the $160.00 strike price on the March 16th options expiration date.

Lam Research Corp. (LRCX) -- New Covered Calls Position
The transactions were as follows:
02/13/2018 Bought 200 shares of Lam Research stock @ $169.41 per share 
02/13/2018 Sold 2 Lam Research Mar 16th, 2017 $160.00 Call options @ $13.68 per share
Note: this was a simultaneous Buy/Write transaction
03/06/2018 Upcoming ex-dividend of $.50 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $31,152.29
= ($169.41 - $13.68)* 200 shares + $6.29 commission
Net Profit Components:
(a) Option Income: +$2,736.00
= ($13.68 * 200 shares)
(b) Dividend Income: +$100.00
= $.50 per share * 200 shares 
(c) Capital Appreciation (If LRCX is above $160.00 strike price at Mar 16th expiration): -$1,886.95
= ($160.00 -$169.41)* 200 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$949.05
= (+$2,736.00 option income +$100.00 dividend income -$1,886.95 capital appreciation)

Absolute Return: +3.05%
= +$949.05/$31,152.29
Equivalent Annualized Return: +34.7%
= (+$949.05/$31,152.29)*(365/32 days)

The downside 'breakeven price' at expiration is at $155.23 ($169.41 - $13.68 - $.50), which is 8.4% below the current market price of $169.41.  This is substantial protection given the relatively high +34.7% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2017 options expiration) for this Lam Research Covered Calls position is 69.6%, so the expected value annualized ROI of this investment (if held until expiration) is +24.2% (+34.7% * 69.6%), a nice expected value profit for this moderately in-the-money Covered Calls position.   

Friday, February 9, 2018

Established Covered Calls in Synchrony Financial

Today, a Covered Calls position was established by buying 500 shares of Synchrony Financial (ticker symbol SYF) stock at $33.83 and selling 5 March 16th, 2018 $32.00 Call options at $2.73 -- a net debit of $31.10. 

It is difficult to maintain our composure and stick with our process in the face of dramatic, unrelenting selling as has occurred during the past two weeks.  However, when the Dow was down over 400 points early this afternoon, I established this position.  Although I put much greater emphasis on stock fundamentals rather than technicals, I was encouraged that the S&P 500 seemed to stabilize even as it broke below both its 150-day and 200-day simple moving averages.  Since programmed trading did not appear to kick in to drive prices even lower, establishing a new Covered Calls position seemed a sensible and timely action.

As detailed below, a potential return-on-investment result is a +2.9% absolute return in 36 days (equivalent to a +29.0% annualized return-on-investment).
This outcome exceeds the Covered Calls Advisor's desired minimum threshold of greater than a +20.0% annualized return-on-investment potential prior to establishing new positions.
Today's transaction and a potential result are detailed below:

1. Synchrony Financial (SYF) -- New Covered Calls Position
The transactions were as follows:
02/09/2018 Bought 500 shares of Synchrony Financial stock @ $33.83 per share 
02/09/2018 Sold 5 Synchrony Financial March 16th, 2018 $32.00 Call options @ $2.73 per share
Two advantageous situations related to this buy/write transaction are:
1. Because of the recent plummet in the overall stock market as well as the price of Synchrony's stock, the Implied Volatility (IV) of the Call options had spiked up to 39.9 when this transaction occurred.  This is substantially higher than the IV(65) value of 29.8 -- which includes the normal pre-earnings volatility spike that occurred just prior to the Jan 19th earnings report
2. The Call option Open Interest was very liquid at 2,768 contracts, so the bid/ask spread was relatively narrow when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $15,558.30
= ($33.83 - $2.73)* 500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$1,365.00
= ($2.73* 500 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If SYF stock is above $32.00 strike price at March 16th expiration): -$919.95
= ($32.00 -$33.83)* 500 shares - $4.95 commission

Total Net Profit: +$445.05
= (+$1,365.00 options income +$0.00 dividend income -$919.95 capital appreciation)

Absolute Return: +2.9%
= +$445.05/$15,558.30
Equivalent Annualized Return: +29.0%
= (+$445.05/$15,558.30)*(365/36 days)

The downside 'breakeven price' at expiration is at $31.10 ($33.83 - $2.73), which is 8.1% below the current market price of $33.83.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2018 options expiration) for this Synchrony Financial Covered Calls position is 68.2%, so the expected value annualized ROI of this investment (if held until expiration) is +19.8% (+29.0% * 68.2%), a nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $34.73 = $33.83 + [$2.73 - ($33.83 - $32.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold SYF stock until the March 16th, 2018 options expiration date rather than establishing this Covered Calls position.

Wednesday, February 7, 2018

Established Covered Calls in Rio Tinto PLC

Today, a Covered Calls position was established in Rio Tinto PLC (ticker symbol RIO) with a March 16th, 2018 expiration and at the $50.00 strike price.  This position has an upcoming semi-annual ex-dividend on March 1st of $1.80 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the April 20th, 2018 options expiration date.  Because of the very large dividend payout, the April 20th expiration was selected to provide an adequate return-on-investment even if the time value in the Call options declines in value by the day prior to the ex-dividend date and the Call owners exercise their option in which case the shares are assigned. 

Rio Tinto just reported their annual earnings for 2017 this morning.  Rio Tinto is a London-based diversified mining company operating mostly in Australia. Largely as a result of increased commodity prices, their financial results were stellar.  Revenues increased to $40 billion, operating cash flow was an impressive $13.9 billion and earnings increased 69% above last year to $8.63 billion.  Mr. Jacques has been the Chief Executive for only about 18 months now, but he is demonstrating a very shareholder friendly management style.  A company record $5.2 billion will be distributed to shareholders in 2018 and an additional $1.0 billion will be used for share buybacks.

As detailed below, a potential return-on-investment result is +0.9% absolute return (equivalent to +15.5% annualized return for the next 22 days) if the stock is assigned early (business day prior to March 1st ex-date); OR +4.6% absolute return (equivalent to +22.8% annualized return over the next 73 days) if the stock is assigned on the April 20th options expiration date.


Rio Tinto PLC (RIO) -- New Covered Calls Position
The transactions were:
02/07/2018 Bought 300 Rio Tinto shares @ $54.04
02/07/2018 Sold 3 Rio Tinto 04/20/2018 $50.00 Call options @ $4.52
Note: a simultaneous buy/write transaction was executed.
03/01/2018 Upcoming semi-annual ex-dividend of $1.80 per share

Two possible overall performance results (including commissions) for this Rio Tinto Covered Calls position are as follows:
Covered Calls Cost Basis: $14,862.96
= ($54.04 - $4.52) *300 + $6.96 commission

Net Profit Components:
(a) Options Income: +$1,356.00
= ($4.52*300 shares)
(b) Dividend Income (If option exercised early on Feb 28th, the business day prior to Mar 1st ex-div date): +$0.00; or
(b) Dividend Income (If RIO assigned at Apr 20th, 2018 expiration): +$540.00
= ($1.80 dividend per share x 300 shares)
(c) Capital Appreciation (If RIO assigned early on Feb 28th): -$1,216.95
+($50.00-$54.04)*300 shares - $4.95 commissions; or
(c) Capital Appreciation (If assigned at $50.00 strike price at options expiration): -$1,216.05
+($50.00-$54.04)*300 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Feb 28th (business day prior to March 1st ex-dividend date)]: +$139.05
= (+$1,356.00 +$0.00 -$1,216.95); or
2. Total Net Profit (If RIO shares assigned at $50.00 at Apr 20, 2018 expiration): +$679.05
= (+$1,356.00 +$540.00 -$1,216.95)

1. Absolute Return [If option exercised on Feb 28th (business day prior to ex-dividend date)]: +0.9%
= +$139.05/$14,862.96
Annualized Return (If option exercised early): +15.5%
= (+$139.05/$14,862.96)*(365/22 days); or
2. Absolute Return (If stock assigned at $50.00 at Apr 20, 2018 expiration): +4.6%
= +$679.05/$14,862.96
Annualized Return (If RIO stock assigned at $50.00 at April 20th, 2018 expiration): +22.8%
= (+$679.05/$14,862.96)*(365/73 days)

Either outcome provides a satisfactory return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $50.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $47.72 ($54.04 -$4.52 -$1.80) provides 11.7% downside protection below today's purchase price.

Covered Calls Established in Bank of America Corp.

Today, a Covered Calls positions was established in Bank of America Corp. (ticker BAC) for the March 16th, 2018 expiration and at the $30.00 strike price when the stock was at $31.03.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.  There is an upcoming ex-dividend of $.12 on March 1st 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 38 days (equivalent to +22.2% on an annualized return basis) if Bank of America stock closes above the $30.00 strike price on the March 16th options expiration date.


Bank of America Corp. (BAC) -- New Covered Calls Position
The transactions were:
02/07/2018 Bought 600 shares of Bank of America stock @ $31.03 per share 
02/07/2018 Sold 6 BAC Mar 16th, 2018 $30.00 Call options @ $1.60 per share
03/01/2018 Upcoming ex-dividend of $.12 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $17,666.97
= ($31.03 - $1.60)* 600 shares + $8.97 commission

Net Profit Components:
(a) Options Income: +$960.00
= ($1.60* 600 shares)
(b) Dividend Income: +$72.00
= $.12 per share * 600 shares 
(c) Capital Appreciation (If Bank of America stock is above $30.00 strike price at Mar 16th expiration): -$622.95
= ($30.00 -$31.03)* 600 shares - $4.95 commission

Potential Total Net Profit (If BAC stock assigned at expiration): +$409.05
= (+$960.00 options income +$72.00 dividend income -$622.95 capital appreciation)

Absolute Return: +2.3%
= +$409.05/$17,666.97
Equivalent Annualized Return: +22.2%
= (+$409.05/$17,666.97)*(365/38 days)

The downside 'breakeven price' at expiration is at $29.31 ($31.03 - $1.60 - $.12), which is 5.5% below the current market price of $31.03.  This is good downside protection given the potential +22.2% annualized ROI for this investment.

Tuesday, February 6, 2018

Established Covered Call Position in Alibaba Group Holding Ltd.

Last week, a Covered Calls position was established in Alibaba Group Holding Ltd. with a March 16th, 2018 options expiration date and at the $180.00 strike price.  The Covered Calls Advisor wanted to establish a second Covered Calls position with March 16th Call options, but instead at the $170 strike price.  So, early in this morning's trading when the Dow was down by about 250 points, an Alibaba buy/write transaction was executed by buying 100 shares at $178.45 and selling one Call option for $14.15.  

As detailed below, a potential return-on-investment result is +3.4% absolute return in 39 days (equivalent to a +32.2% annualized return-on-investment).
Today's transactions and potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
The transactions were as follows:
02/06/2018 Bought 100 shares of Alibaba stock @ $178.45 per share 
02/06/2018 Sold 1 Alibaba March 16th, 2018 $170.00 Call option @ $14.15 per share
Notes: 1. The Implied Volatility of the Call option had spiked up to 39.4 when this transaction occurred; and 2. The Call option Open Interest was very liquid at 1,133 contracts, so the bid/ask spread was relatively narrow.

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $16,435.62
= ($178.45 - $14.15)* 100 shares + $5.62 commission

Net Profit Components:
(a) Options Income: +$1,415.00
= ($14.15* 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at March 16th expiration): -$849.95
= ($170.00 -$178.45)* 100 shares - $4.95 commission

Total Net Profit: +$565.05
= (+$1,415.00 options income +$0.00 dividend income -$849.95 capital appreciation)

Absolute Return: +3.4%
= +$565.05/$16,435.62
Equivalent Annualized Return: +32.2%
= (+$565.05/$16,435.62)*(365/39 days)

The downside 'breakeven price' at expiration is at $174.95 ($178.45 - $14.15), which is 7.9% below the current market price of $178.45.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2018 options expiration) for this Alibaba Covered Call position is 67.1%, so the expected value annualized ROI of this investment (if held until expiration) is +21.6% (+32.2% * 67.1%), a nice result for this moderately in-the-money Covered Call position.

The 'crossover price' at expiration is $184.15 = $178.45 + [$14.15 - ($178.45 - $170.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the March 16th, 2018 options expiration date rather than establishing this Covered Call position.

Friday, February 2, 2018

Established Covered Calls Position in Alibaba Group Holding Ltd.

Today, a new Covered Calls positions was established in Alibaba Group Holding Ltd. with a March 16th, 2018 options expiration date and at the $180.00 strike price when Alibaba was priced at $187.30.  This is the second Covered Calls position now in the Covered Calls Advisor portfolio in Alibaba.  The prior position was for the February 16th expiration at the $170.00 strike price.

As this transaction demonstrates, the Covered Calls Advisor intends to continue the pattern of prior months by establishing ongoing monthly Covered Calls positions in Alibaba.  The quarterly earnings report was released before market open yesterday, and the stock has declined swiftly (by 8%) during the two market trading days since then.  I believe this abrupt selling was caused by the decline in operating margins compared with prior quarters, a result that is understandable given the numerous growth initiatives (offline retail in China, international development, equity stake in Ant Financial, etc., etc.) that are being wisely pursued.  Moreover, Alibaba's forecast is that revenue growth of about 55% will continue next quarter, in which case the trailing twelve months P/E ratio based on today's price would likely be about 37, high for most companies, but a good value given their ongoing growth potential.  I consider the price action of the past two days to be unwarranted and hopefully the current oversold condition will reverse itself in very short order. 

As detailed below, a potential return-on-investment result is +2.9% absolute return in 43 days (equivalent to a +24.4% annualized return-on-investment).
Today's transactions and potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
The transactions were as follows:
02/02/2018 Bought 300 shares of Alibaba stock @ $187.30 per share 
02/02/2018 Sold 3 Alibaba March 16th, 2018 $180.00 Call options @ $12.35 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: $52,554.60
= ($187.30 - $12.35)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$3,705.00
= ($12.35* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $180.00 strike price at March 16th expiration): -$2,194.95
= ($180.00 -$187.30)* 300 shares - $4.95 commission

Total Net Profit: +$1,510.05
= (+$3,705.00 options income +$0.00 dividend income -$2,194.95 capital appreciation)

Absolute Return: +2.9%
= +$1,510.05/$52,554.60
Equivalent Annualized Return: +24.4%
= (+$1,510.05/$52,554.60)*(365/43 days)

The downside 'breakeven price' at expiration is at $174.95 ($187.30 - $12.35), which is 6.6% below the current market price of $187.30. 
A recent quantitative study titled "Which Index Options Should You Sell" () provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options in the range of -0.5 to -0.6 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Alibaba position, the $180.00 Mar2018 monthly option was selected since its breakeven price is -0.6 standard deviations from the current price of $187.30.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2018 options expiration) for this Alibaba Covered Calls position is 67.2%, so the expected value annualized ROI of this investment (if held until expiration) is +16.4% (+24.4% * 67.2%), a nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $192.85 = $187.30 + [$12.35 - ($187.30 - $180.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the March 16th, 2018 options expiration date rather than establishing this Covered Calls position.

Thursday, February 1, 2018

Covered Calls Established in Valero Energy Corp.

Today, a Covered Calls positions was established in Valero Energy Corp. (ticker VLO) for the February 16th, 2018 expiration and at the $92.50 strike price when the stock was at $93.53.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.

The Implied Volatility of these options was 27.8 when this position was established and the open interest was 1,300 contracts.  There is an upcoming ex-dividend of $.80 on February 12th which is included in the analysis below.

As detailed below, a potential outcome for this investment is +2.4% absolute return-on-investment for the next 16 days (equivalent to +54.7% on an annualized return basis) if Valero Energy stock closes above the $92.50 strike price on the February 16th options expiration date.


Valero Energy Corp. (VLO) -- New Covered Calls Position
The transactions were:
02/01/2018 Bought 200 shares of Valero Energy stock @ $93.53 per share 
02/01/2018 Sold 2 Valero Energy Feb 16th, 2018 $92.50 Call options @ $2.44 per share
02/12/2018 Upcoming ex-dividend of $.80 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,224.29
= ($93.53 - $2.44)* 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$488.00
= ($2.44* 200 shares)
(b) Dividend Income: +$160.00
= $.80 per share * 200 shares 
(c) Capital Appreciation (If Valero stock is above $92.50 strike price at Feb 16th expiration): -$210.95
= ($92.50 -$93.53)* 200 shares - $4.95 commission

Potential Total Net Profit (If VLO stock assigned at expiration): +$437.05
= (+$488.00 options income +$160.00 dividend income -$210.95 capital appreciation)

Absolute Return: +2.4%
= +$437.05/$18,224.29
Equivalent Annualized Return: +54.7%
= (+$437.05/$18,224.29)*(365/16 days)

The downside 'breakeven price' at expiration is at $90.29 ($93.53 - $2.44 - $.80), which is 3.5% below the current market price of $93.53.  This is good downside protection given the very attractive +54.7% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Feb 18th, 2018 options expiration) for this Valero Covered Calls position is 58.9%, so the expected value annualized ROI of this investment (if held until expiration) is +32.2% (+54.7% * 58.9%), a very nice expected value result for this conservative in-the-money Covered Calls position.  

Covered Calls Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel Corp. (ticker X) for the March 16th, 2018 expiration and at the $36.00 strike price when the stock was at $36.72.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, an in-the-money position was established.

The Implied Volatility of these options was 43.7 when this position was established and the open interest was 458 contracts.  There is a likely upcoming ex-dividend of $.05 on February 8th which is included in the analysis below and there is no quarterly earnings report prior to expiration..


As detailed below, a potential outcome for this investment is a +5.7% absolute return-on-investment for the next 44 days (equivalent to +47.1% on an annualized return basis) if U.S. Steel stock closes above the $36.00 strike price on the options expiration date.



United States Steel Corp. (X) -- New Covered Calls Position
The transactions were:
02/01/2018 Bought 400 shares of U.S. Steel stock @ $36.72 per share 
02/01/2018 Sold 4 U.S. Steel Mar 16th, 2018 $36.00 Call options @ $2.62 per share
Note: this was a simultaneous Buy/Write transaction
02/08/2018 Upcoming ex-dividend of $.05 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $13,647.63
= ($36.72 - $2.62)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$1,048.00
= ($2.62* 400 shares)
(b) Dividend Income: +$20.00
= $.05 per share * 400 shares 
(c) Capital Appreciation (If X is above $36.00 strike price at Mar 16th expiration): -$292.95
= ($36.00 -$36.72)* 400 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$775.05
= (+$1,048.00 options income +$20.00 dividend income -$292.95 capital appreciation)

Absolute Return: +5.7%
= +$775.05/$13,647.63
Equivalent Annualized Return: +47.1%
= (+$775.05/$13,647.63)*(365/44 days)

The downside 'breakeven price' at expiration is at $34.05 ($36.72 - $2.62 - $.05), which is 7.3% below the current market price of $36.72.  This is good downside protection given the very attractive +47.1% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2018 options expiration) for this U.S. Steel Covered Calls position is 59.8%, so the expected value annualized ROI of this investment (if held until expiration) is +28.2% (+47.1% * 59.8%), a nice expected value result for this slightly in-the-money Covered Calls position.  

Roll Up and Out Covered Calls in Blackstone Group LP

Yesterday, a new Covered Calls position was established in Blackstone Group L.P. (ticker BX) for the February 16th, 2018 options expiration at the $35.00 strike price when the stock was at $36.24.  Today, they reported both earnings and revenues that exceeded analysts' expectations.  In addition, they declared a quarterly distribution of $.85 that goes ex-distribution in one week (on February 8th).  Fortunately, this was substantially higher than expected since the distribution was $.47 in the same quarter last year.

When the stock was at $37.13 today and the time value remaining in the Feb2018 $35.00 Calls was only $.06, this Advisor decided to roll-up-and-out to the March 16th, 2018 $36.00 strike price.  The net debit for this transaction was $.70 per share -- $1.49 credit for selling-to-open the March $36 Calls and $2.19 debit for buying-to-close the February $35 Calls.  Based on the Covered Calls Advisor's current Neutral sentiment, an in-the-money position was established.

As detailed below, two potential return-on-investment results are (1) a +1.5% absolute return in 9 days (equivalent to a +62.3% annualized return-on-investment) if assigned early on the day prior to the Feb 8th ex-distribution date; or (2) a +4.0% absolute return in 45 days (equivalent to a +32.3% annualized return-on-investment) if assigned at expiration.

Blackstone Group L.P. (BX) -- Roll Up and Out Covered Calls Position
The implied volatility of the Call options was 28.5 and the open interest was 7,570 contracts today when this roll-up-and-out transaction was made. 

The transactions to-date are as follows:
01/31/2018 Bought 500 shares of Blackstone Group stock @ $36.24 per share 
01/31/2018 Sold 5 BX February 16th, 2018 $35.00 Call options @ $1.50 per share
Note: this was a simultaneous Buy/Write transaction
02/01/2018 Rolled-Up-and-Out to the March 16th, 2018 $36.00 strike price at at net debit of $.70 ($2.19 - $1.49) per share
02/08/2018 Upcoming ex-distribution of $.85 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $17,378.30
= ($36.24 - $1.50)* 500 shares + $8.30 commissions

Net Profit Components:
(a) Options Income: +$391.70
= ($1.50 - $.70) * 500 shares -$8.30 commissions
(b) Distribution Income (If BX assigned early on day prior to Feb 8th ex-distribution date) : +$0.00; OR
(b) Distribution Income (If BX assigned on March 16th options expiration date):  $425.00
= $.85 per share * 500 shares 
(c) Capital Appreciation (If BX stock is assigned early on day prior to Feb 8th ex-distribution date):  -$124.95
= ($36.00 - $36.24) * 500 shares -$4.95 commission; OR
(c) Capital Appreciation (If BX stock is in-the-money, so assigned on March 16th expiration date): -$124.95
= ($36.00 - $36.24) * 500 shares -$4.95 commission

1. Total Net Profit (If BX assigned early on day prior to Feb 8th ex-distribution date) : +$266.75
= (+$391.70 options income +$0.00 distribution income -$124.95 capital appreciation); OR
2. Total Net Profit (If BX assigned at March 16th options expiration date):  +$691.75
= (+391.70 options income + $425.00 distribution income - $124.95 capital appreciation)

1. Absolute Return (If BX assigned early): +1.5%
= +$266.75/$17,378.30
Equivalent Annualized Return: +62.3%
= (+$266.75/$17,378.30)*(365/9 days); OR
2. Absolute Return (If BX assigned at March 16th options expiration): +4.0%
= +$691.75/$17,378.30
Equivalent Annualized Return: +32.3%
= (+$691.75/$17,378.30)*(365/45 days)