Covered Calls Established in Merck & Co. Inc. and SPDR S&P 500 ETF

Today, two new Covered Calls positions were established in Merck & Co. Inc. (ticker MRK) and the SPDR S&P 500 ETF (SPY) with March 20th, 2020 options expiration dates. The two Merck Call options were sold at $5.82 for the $75.00 strike price when the stock price was $79.95 and 100 shares of the SPDR S&P 500 ETF were purchased at $292.34 while one Call was sold at $27.84 at the $270.00 strike price.   Both positions were established early in today's trading session when the Dow was down about 800 points.

Merck goes ex-dividend at $.61 per share on March 13th (prior to the March 20th options expiration) and this is included in the potential return-on-investment results shown below.  All ten criteria in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet were met for this position. 

In the case of the SPDR S&P 500 ETF position, this morning the Implied Volatility of the Call options spiked up to 61.4, an extraordinarily high level for the S&P 500 index.  A more normal, average level for the S&P 500 Volatility Index (VIX) is around 15, so current Coronavirus fears have resulted in this dramatic spike in the Implied Volatility in the options market.  The Covered Calls Advisor is currently less than 20% invested (the remaining cash being temporarily in a money market fund currently yielding 1.34%).  As is the case with these two investments today, additional cash will be invested in Covered Calls (or 100% Cash-Secured Puts) gradually in the weeks ahead and on down days like today when the Implied Volatility spikes higher and the options income obtainable from Covered Calls is very attractive.  I will also continue tracking the Coronavirus statistics daily (link) and will deploy cash into additional investments more aggressively when daily new cases peaks and begins to decline and will further accelerate new investments to the point of being fully invested when daily new cases continue to decline to the point when they are less than daily new recoveries.

Given the stock market's sharp decline in the past few weeks along with the Covered Calls Advisor's Slightly Bearish overall market outlook, moderately in-the-money Covered Calls were established for both of the two new positions established today.
 

As detailed below, the potential return-on-investment results are: 

• Merck & Co. Inc. : +2.0% absolute return in 15 days (equivalent to a +48.6% annualized return-on-investment); and

• SPDR S&P 500 ETF : +2.1% absolute return in 15 days (equivalent to a +50.6% annualized return-on-investment) 

1.  Merck & Co. Inc. (MRK) -- New Covered Calls Position

The transactions were as follows:
03/06/2020 Bought 200 shares of Merck & Co. stock @ $79.95 per share 
03/06/2020 Sold 2 MRK March 20th, 2020 $75.00 Call options @ $5.82 per share
Note: The Open Interest in these Calls was 296 contracts.
03/13/2020 Upcoming ex-dividend of $.61 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $14,827.34
= ($79.95 - $5.82)* 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,164.00
= ($5.82 * 200 shares)
(b) Dividend Income: +$122.00
= $.61 per share * 200 shares 
(c) Capital Appreciation (If Merck stock is above $75.00 strike price at Mar 20th expiration): -$990.00
= ($75.00 -$79.95) * 200 shares

Potential Total Net Profit (If Merck stock assigned at expiration): +$296.00
= (+$1,164.00 options income +$122.00 dividend income -$990.00 capital appreciation)

Absolute Return: +2.0%
= +$296.00/$14,827.34
Equivalent Annualized Return: +48.6%
= (+$296.00/$14,827.34)*(365/15 days)

The downside 'breakeven price' at expiration is at $73.52 ($79.95 - $5.82 - $.61), which is 8.0% below the current market price of $79.95.  This is excellent downside protection given the attractive potential +48.6% annualized ROI for this investment.


2. SPDR S&P 500 ETF (SPY) -- New Covered Call Position

The transactions were as follows:
03/06/2020 Bought 100 shares of S&P 500 ETF @ $292.34 per share 
03/06/2020 Sold 1 SPDR S&P 500 ETF March 20, 2020 $270.00 Call option @ $27.84 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: $26,450.67
= ($292.34 - $27.84) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$2,784.00
= ($27.84 * 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If SPY is above $270.00 strike price at March 20th expiration): -$2,234.00
= ($270.00 -$292.34) * 100 shares

Total Net Profit: +$550.00
= (+$2,784.00 options income +$0.00 dividend income -$2,234.00 capital appreciation)

Absolute Return: +2.1%
= +$550.00/$26,450.67
Equivalent Annualized Return: +50.6%
= (+$550.00/$26,450.67)*(365/15 days)

The downside 'breakeven price' at expiration is at $264.50 ($292.34 - $27.84), which is 9.5% below the current market price of $292.34.