As detailed below, a potential outcome for this investment is +2.3% absolute return-on-investment for the next 15 days (equivalent to +55.1% on an annualized return basis) if the stock closes above the $35.00 strike price on the Dec 21st options expiration date.
Fluor Corp.(FLR) -- New Covered Calls Position
12/07/2018 Bought 200 shares of Fluor stock @ $36.25 per share
12/07/2018 Sold 2 Fluor Dec 21st, 2018 $35.00 Call options @ $2.05 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: $6,846.29
= ($36.25 - $2.05)* 200 shares + $6.29 commission
Net Profit Components:
(a) Option Income: +$410.00
= ($2.05 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Fluor stock is above $35.00 strike price at Dec 21st expiration): -$254.95
= ($35.00 -$36.25)* 200 shares - $4.95 commission
Potential Total Net Profit (If Fluor assigned at expiration): +$155.05
= (+$410.00 option income +$0.00 dividend income -$254.95 capital appreciation)
Absolute Return: +2.3%
= +$155.05/$6,846.29
Equivalent Annualized Return: +55.1%
= (+$155.05/$6,846.29)*(365/15 days)
The downside 'breakeven price' at expiration is at $34.20 ($36.25 - $2.05), which is 5.7% below the current market price of $36.25. This is good protection given the very high +55.1% potential annualized ROI for this investment.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the December 21st, 2018 options expiration) for this Fluor Corp. Covered Calls position is 66.3%, so the expected value annualized ROI of this investment (if held until expiration) is +36.5% (+55.1% * 66.3%), an attractive expected value profit for this in-the-money Covered Calls position.
