Established Covered Calls Position in PulteGroup Inc.

Today, a Covered Calls position was established in PulteGroup Inc.(ticker symbol PHM) with an April 20th, 2018 expiration at the $28.00 strike price. The stock was purchased at $29.19 and the Call options sold at $1.71 per share.  Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a moderately in-the-money position was established.

The Implied Volatility of these Call options was 27.9 when this position was established.  This is noticeably higher than the average Historic Volatility for Pulte during non-earnings months during the past year, especially since there is no quarterly earnings report prior to  the April 20th expiration.

Pulte appeared on this Advisor's 'Multifactor' screen, which was developed from a combination of several valuation, profitability, capital allocation, and growth factors identified from the research results contained in Richard Tortoriello's book "Quantitative Strategies for Achieving Alpha".  At the present time for consumer oriented companies, the Covered Calls Advisor prefers companies expected to increase earnings substantially this year and that will benefit significantly from the corporate tax rate reduction recently passed into law.  Pulte certainly qualifies in this regard since their 2017 tax rate was 52.4% and they are currently expected to increase earnings by approximately +42% this year.

As detailed below, a potential outcome is +1.8% absolute return in 33 days (equivalent to a +19.4% annualized return-on-investment) if the price of Pulte remains above the strike price at expiration.


The details for this position are:

1. PulteGroup Inc. (PHM) -- New Covered Calls Position

The transactions were as follows:
03/19/2018 Bought 600 Pulte shares @ $29.19
03/19/2018 Sold 6 Pulte Apr 20, 2018 $28.00 Call options @ $1.71
Note: a simultaneous buy/write transaction was executed.

A possible overall performance result (including commissions) for this Pulte Covered Calls position is as follows:
Stock Purchase Cost: $17,522.97
= ($29.19 - $1.71) *600 shares +$8.97 commission

Net Profit Components:
(a) Options Income: +$1,026.00
= ($1.71*600 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If stock assigned at Apr 20, 2018 options expiration): -$718.95
=+($28.00-$29.19)*600 - $4.95 commissions

Total Net Profit (If Pulte stock assigned at $28.00 at April 20th expiration): +$307.05

= (+$1,026.00 +$0.00 -$718.95)

Absolute Return (If Pulte assigned at $28.00 on April 20th options expiration date): +1.8%

= +$307.05/$17,522.97

Annualized Return: +19.4%

= (+$307.05/$17,522.97)*(365/33 days)

The downside 'breakeven price' at expiration is at $27.48 ($29.19 - $1.71), which is 5.9% below the current market price of $29.19.  This is substantial downside protection given the potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the April 20th, 2018 options expiration) for this PulteGroup Covered Calls position is 69.1%, so the expected value annualized ROI of this investment (if held until expiration) is +13.4% (+19.4% * 69.1%), a satisfactory expected value result for this moderately in-the-money Covered Calls position.