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
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.
