Establish Covered Calls Position in Diamondback Energy

A new monthly Covered Calls position was established in Diamondback Energy (ticker symbol FANG) with an October 18th, 2019 options expiration date and at the $85.00 strike price when Diamondback Energy was priced at $89.61.  There are no earnings reports or ex-dividends prior to the options expiration date. 

Remarkably, analysts are universally bullish on Diamondback Energy.  According to Reuters, all thirty-four analysts rating Diamondback's stock have it as either a 'Buy' or 'Outperform'.  None rate it as 'Neutral', 'Underperform', or 'Sell'.  Their average price target is 60% above its current price (one of the highest potential increases in the S&P 500).         

As shown below, the potential return-on-investment result is +2.0% absolute return in 19 days (equivalent to a +38.6% annualized return-on-investment).


Diamondback Energy (FANG) -- New Covered Calls Position

The transactions were as follows:
09/30/2019 Bought 200 shares of Diamondback stock @ $89.61 per share 
09/30/2019 Sold 2 Diamondback October 18th, 2019 $85.00 Call options @ $6.13 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 39.5. 

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,666.29
= ($89.61 - $6.31) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$1,262.00
= ($6.31 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If FANG stock is above $85.00 strike price at October 18th expiration): -$926.95
= ($85.00 -$89.61) * 200 shares - $4.95 commission

Total Net Profit: +$335.05
= (+$1,262.00 options income +$0.00 dividend income -$926.95 capital appreciation)

Absolute Return: +2.0%
= +$335.05/$16,666.29
Equivalent Annualized Return: +38.6%
= (+$335.05/$16,666.29)*(365/19 days)

The downside 'breakeven price' at expiration is at $83.30 ($89.61 - $6.31), which is 7.0% below the current market price of $89.61.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 19, 2019 options expiration) for this Diamondback Covered Calls position is 73.4%, so the expected value annualized ROI of this investment (if held until expiration) is +28.3% (+38.6% * 73.4%), a very good result for this moderately in-the-money Covered Calls position, especially given that there is no earnings report prior to the options expiration date.

The 'crossover price' at expiration is $91.31 = $89.61 + [$6.31 - ($89.61 - $85.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Diamondback Energy stock until the October 18th, 2019 options expiration date rather than establishing this Covered Calls position.