May 29th, 2020 Options Expiration -- Applied Materials Inc. Covered Calls Position Assigned

The May 29th, 2020 $52.00 Covered Call position in Applied Materials Inc. expired in-the-money, so the 300 shares of AMAT were assigned (i.e. sold) at the $52.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +1.9% absolute return (equivalent to +62.1% annualized return-on-investment for the 11 days holding period).

Applied Materials Inc. (AMAT) -- Covered Calls Position Closed

The transactions were as follows:
05/19/2020 Bought 300 shares of Applied Materials Inc. @ $54.21 per share 
05/19/2020 Sold 3 Applied Materials May 29th, 2020 $52.00 Call options @ $2.95 per share
Note: the Implied Volatility of the Call option was 42.3 and the next quarterly earnings report is after the 5/29/2020 expiration date
05/20/2020 Ex-dividend date at $.22 per share
05/29/2020 3 AMAT May 29th, 2020 $52.00 Call options were in-the-money, so the options expired and the 300 shares of AMAT stock were sold at the $52.00 strike price.
Note: AMAT stock price was $56.18 at the market close on the 5/29 options expiration date.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $15,380.01
= ($54.21 - $2.95) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$885.00
= ($2.95 * 300 shares)
(b) Dividend Income: +$66.00
= $.22 per share x 300 shares 
(c) Capital Appreciation (Applied Materials stock was above $52.00 strike price at the May 29th options expiration): -$663.00
= ($52.00 -$54.21) * 300 shares

Total Net Profit: +$288.00
= (+$885.00 options income +$66.00 dividend income -$663.00 capital appreciation)

Absolute Return: +1.9%
= +$288.00/$15,380.01
Equivalent Annualized Return: +62.1%
= (+$288.00/$15,380.01)*(365/11 days)

Established Covered Calls Position in American International Group Inc.

Today a Covered Calls position was established in American International Group Inc. (ticker symbol AIG) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $31.19 and three June 19th, 2020 Call options were sold at $2.97 at the $29.00 strike price.

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a $.32 per share ex-dividend on June 12th is prior to the June 19th options expiration date.  Importantly to the Covered Calls Advisor's analysis, all nine criteria of the  Dividend Capture Strategy (see table at end of this post) are met with this position.  The Covered Calls Advisor's current Overall Market Meter outlook remains Bearish meaning that my best estimate is that the stock market will be lower a month from today.  If so, the appropriate Covered Calls strategy is to sell in-the-money strike prices.  Even if the stock market declines during the next month, hopefully the decline will be a moderate one and the stock price of American International Group will not decline below its $29.00 strike price at closing on the June 19th options expiration date, in which case the maximum potential profit in this AIG position would be achieved even as the stock market declines.   

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

•  +2.8% absolute return (equivalent to +67.2% annualized return for the next 15 days) if the stock is assigned early (business day prior to the June 12th ex-dividend date); OR 

• +3.9% absolute return (equivalent to +61.8% annualized return over the next 23 days) if the stock is assigned on the June 19th options expiration date.

American International Group Inc. (AIG) -- New Covered Calls Position
The transactions are:

05/28/2020 Bought 300 American International Group shares @ $31.19
05/28/2020 Sold 3 AIG 6/19/2020 $29.00 Call options @ $2.97
Note: a simultaneous buy/write transaction was executed.  Open Interest in these Calls was 1,884 contracts and their Implied Volatility was 49.3 when this position was transacted.
06/12/2020 Upcoming quarterly ex-dividend of $.32 per share
Note: the annual dividend yield at the purchase price is 4.1%.

Two possible overall performance results (including commissions) for this American International Group Covered Calls position are as follows:
Covered Calls Cost Basis: $8,468.01
= ($31.19 - $2.97) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$891.00
= ($2.97 * 300 shares)
(b) Dividend Income (If option exercised early on June 11th, the business day prior to the June 12th ex-div date): +$0.00; or
(b) Dividend Income (If AIG stock assigned at June 19th, 2020 options expiration): +$96.00
= ($.32 dividend per share x 300 shares)

(c) Capital Appreciation (If AIG Call options assigned early on June 11th): -$657.00
+($29.00 - $31.19) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $29.00 strike price at options expiration): -$657.00
+($29.00 - $31.19) * 300 shares

1. Total Net Profit [If option exercised on June 11th (business day prior to the June 12th ex-dividend date)]: +$234.00

= (+$891.00 options income +$0.00 dividend income -$657.00 capital appreciation); or

2. Total Net Profit (If AIG shares assigned at $29.00 at June 19th, 2020 expiration): +$330.00

= (+$891.00 +$96.00 -$657.00)

1. Absolute Return [If option exercised on June 11th (business day prior to ex-dividend date)]: +2.8%

= +$234.00/$8,468.01

Annualized Return (If option exercised early): +67.2%

= (+$234.00/$8,468.01)*(365/15 days); or

2. Absolute Return (If AIG shares assigned at $29.00 at June 19th, 2020 options expiration): +3.9%

= +$330.00/$8,468.01

Annualized Return (If AIG shares assigned at $55.00 at June 19th, 2020 expiration): +61.8%

= (+$330.00/$8,468.01)*(365/23 days)

Either outcome provides a very attractive return-on-investment result for this AIG investment.  These returns will be achieved as long as the stock is above the $29.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $27.90 ($31.19 -$2.97 -$.32) provides 10.5% downside protection below today's stock purchase price.

There is a 70.1% probability that the Calls will be above the $29.00 strike price at options expiration and thus the maximum potential profit would be achieved.

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position.  As shown below with this American International Group position, all nine criteria are met.

Roll Up Discover Financial Services Covered Calls Position

On May 19th, the Covered Calls Advisor established a Covered Calls position in Discover Financial Services at the June 19th, 2020 $35.00 strike price.  The price of the 300 Discover Financial shares has spiked higher from the purchase price of $40.70 last Friday to $49.22 this afternoon about 25 minutes prior to the market close.

As was the case with the roll up this morning of the Goldman Sachs position, the Covered Calls Advisor decided to roll up from the $35.00 strike to the $42.50 strike at the same June 19th, 2020 options expiration date.  A vertical debit spread transaction was executed at a net debit of $6.77 ($14.62 - $7.85) per share.  There was only $.40 time value remaining in the $35.00 Calls for the next 24 days and trading up to the $42.50 call added $.73 to the remaining time value while also increasing the potential capital appreciation if DFS closes above $42.50 at expiration by $7.50 per share ($42.50 new strike price - $35.00 original strike price).

A potential return-on-investment result for this Discover Financial Covered Calls position is +5.8% absolute return in 32 days (equivalent to a +65.9% annualized return-on-investment) if the stock price closes above the $42.50 strike price on the June 19th options expiration date. 
By rolling up the original Covered Calls, this result would exceed the +3.7% absolute return (+42.0% annualized) that was the maximum potential of the original Covered Calls position at the $35.00 strike price.  In Covered Calls investing parlance, this is sometimes referred to as "hitting a double" (instead of the usual "single"), since the roll up enables us to sell Calls twice against the original stock purchase with both being at the same options expiration date.

The detailed transactions and a potential result are provided below.   


Discover Financial Services (DFS) -- Continuation of Covered Calls Position

The transactions were as follows:
05/19/2020 Bought 300 shares of Discover Financial shares @ $40.70 per share 
05/19/2020 Sold 3 Discover June 19th, 2020 $35.00 Call options @ $6.52 per share
05/20/2020 Ex-dividend at $.44 per share
05/27/2020 Roll up transaction executed:
Bought-to-Close 3 DFS 6/19/2020 $35.00 Call options @ $14.62 per share and simultaneously Sold-to-Open 3 DFS 6/19/2020 $42.50 Call options @ $7.85 per share
Note: The estimated probability that the $42.50 Call options close in-the-money on the June 19th options expiration date was 75.4% when this roll up transaction was executed.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $10,256.01
= ($40.70 - $6.52) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: -$79.02
= ($6.52 - $14.62 + $7.85) * 300 shares + $4.02 commission
(b) Dividend Income: +$132.00
= $.44 per share x 300 shares 
(c) Capital Appreciation (If Discover stock is above $42.50 strike price at the June 19th options expiration): +$540.00
= ($42.50 -$40.70) * 300 shares

Total Net Profit: +$592.98
= (-$79.02 options income +$132.00 dividend income +$540.00 capital appreciation)

Absolute Return: +5.8%
= +$592.98/$10,256.01
Equivalent Annualized Return: +65.9%
= (+$592.98/$10,256.01)*(365/32 days)

Covered Call Position Established in Alphabet Inc.

A new Covered Call position has been established in Alphabet Inc. (ticker GOOGL) with a June 19th, 2020 options expiration date. One Alphabet Call option was sold at $53.54 at the $1,375.00 strike price when the stock price was $1,402.57.  A moderately in-the-money strike price was chosen because of the Covered Calls Advisor's Bearish Overall Market Meter outlook.

As detailed below, the potential return-on-investment result is +1.9% absolute return in 24 days (equivalent to a +29.3% annualized return-on-investment).  

Alphabet Inc.(GOOGL) -- New Covered Call Position

The transaction was as follows:
05/27/2020 Bought 100 shares of Alphabet Inc. stock @ $1,402.57 per share 
05/27/2020 Sold 1 Alphabet Inc. June 19th, 2020 $1,375.00 Call option @ $53.54 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call option was 26.2 and the Open Interest was 3,121 contracts when this transaction was executed. 

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $134,903.67
= ($1,402.57 - $53.54) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$5,354.00
= ($53.54 * 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Alphabet stock is above $1,375.00 strike price at June 19th expiration): -$2,757.00
= ($1,375.00 - $1,402.57) * 100 shares

Total Net Profit: +$2,597.00
= (+$5,354.00 options income +$0.00 dividend income -$2,757.00 capital appreciation)

Absolute Return: +1.9%
= +$2,597.00/$134,903.67
Equivalent Annualized Return: +29.3%
= (+$2,597.00/$134,903.67)*(365/24 days)

The downside 'breakeven price' at expiration is at $1,349.03 ($1,402.57 - $53.54), which is 3.8% below the current market price of $1,402.57.

Roll Up Goldman Sachs Group Covered Call Position

Last Friday, the Covered Calls Advisor established a Covered Call position in Goldman Sachs at the June 16th, 2020 $170.00 strike price.  The price of the 100 Goldman Sachs shares has spiked higher from the purchase price of $178.10 last Friday to $202.10 this morning when this roll up transaction was executed.  The $1.25 quarterly ex-dividend date is this Friday and there was only $.35 time value remaining in the June 16th $170.00 Call options.  The Covered Calls Advisor wants to retain a Covered Calls position and capture the dividend, so a decision was made to roll up from the $170.00 strike to the $190.00 strike at the same June 19th, 2020 options expiration date and this vertical debit spread was executed at a net debit of $17.51 ($32.86 - $15.35) per share. 

A potential return-on-investment result for this Goldman Sachs Covered Call position is +4.6% absolute return in 29 days (equivalent to a +58.3% annualized return-on-investment) if the stock price closes above the $190.00 strike price on the June 19th options expiration date.  By rolling up the original Covered Call, this result would exceed the +3.1% absolute return (+39.5% annualized) that was the maximum potential of the original Covered Calls position at the $170.00 strike price.

The detailed transactions and a potential result are provided below.   

Goldman Sachs Group (GS) -- Continuation of Covered Call Position

The buy/write transaction was as follows:
05/22/2020 Bought 100 shares of Goldman Sachs stock @ $178.10 per share 
05/22/2020 Sold 1 June 19th, 2020 $170.00 Call option @ $12.06 per share
Note: The Open Interest in these Calls was 991 contracts and the Implied Volatility was 38.4.
05/27/2020 Roll up transaction executed:
Bought-to-Close 1 GS 6/19/2020 $170.00 Call option @ $32.86 per share and simultaneously Sold-to-Open 1 GS 6/19/2020 $190.00 Call option @ $15.35 per share
Note: The estimated probability that the $190.00 Call option closes in-the-money on the options expiration date was 72.6% when this roll up transaction was executed.
05/29/2020 Upcoming quarterly ex-dividend of $1.25 per share



A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,604.67
= ($178.10 - $12.06) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: -$546.34
= ($12.06 - $32.86 + $15.35) * 100 shares - $1.34 commission
(b) Dividend Income: +$125.00
= $1.25 per share x 100 shares 
(c) Capital Appreciation (If GS stock is above $190.00 strike price at the June 19th expiration): +$1,190.00
= ($190.00 - $178.10) * 100 shares

Total Net Profit: +$768.66
= (-$546.34 options income +$125.00 dividend income +$1,190.00 capital appreciation)

Absolute Return: +4.6%
= +$768.66/$16,604.67
Equivalent Annualized Return: +58.3%
= (+$768.66/$16,604.67)*(365/29 days)

Three New Covered Calls Positions Established in Borg Warner, Goldman Sachs, and International Paper

Today, three new Covered Calls positions were established in Borg Warner Inc. (BWA), Goldman Sachs Group (GS), and International Paper Inc. (IP) all with June 19th, 2020 options expiration dates.  Each position has an intervening ex-dividend prior to the expiration date which is included in the return-on-investment details provided below.  All three positions were established in-the-money and these companies have no earnings reports prior to the June 19th options expiration date.  

Three hundred Borg Warner shares were purchased at $29.32 and three $27.50 Call options were sold at $2.47, a net debit of $26.85 per share.  One hundred Goldman Sachs shares were purchased at $178.10 and one $170.00 Call option was sold at $12.06, a net debit of $166.04 per share.  Two hundred International Paper shares were purchased at $32.61 and two $30.00 Call options were sold at $2.91, a net debit of $29.70 per share. 


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

• Borg Warner Inc. : +3.0% absolute return in 29 days (equivalent to a +38.0% annualized return-on-investment);
• Goldman Sachs Group : +3.1% absolute return in 29 days (equivalent to a +39.5% annualized return-on-investment); and
• International Paper Inc. : +2.7% absolute return in 29 days (equivalent to a +34.4% annualized return-on-investment)

1.  Borg Warner Inc. (BWA) -- New Covered Calls Position

The buy/write transaction was as follows:
05/22/2020 Bought 300 shares of Borg Warner stock @ $29.32 per share 
05/22/2020 Sold 3 June 19th, 2020 $27.50 Call options @ $2.47 per share 
Note: The Open Interest in these Calls was 350 contracts and their Implied Volatility was 42.7
05/29/2020 Ex-dividend of $.17 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $8,057.01
= ($29.32 - $2.47) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$741.00
= ($2.47 * 300 shares)
(b) Dividend Income: +$51.00
= $.17 per share x 300 shares
(c) Capital Appreciation (If BWA is above $27.50 strike price at June 19th expiration): -$546.00
= ($27.50 -$29.32) * 300 shares

Potential Total Net Profit (If Borg Warner price is above $27.50 strike price at June 19th options expiration): +$246.00
= (+$741.00 options income +$51.00 dividend income - $546.00 capital appreciation)

Absolute Return: +3.0%
= +$246.00/$8,057.01
Equivalent Annualized Return: +38.0%
= (+$246.00/$8,057.01)*(365/29 days)


2. Goldman Sachs Group (GS) -- New Covered Call Position

The buy/write transaction was as follows:
05/22/2020 Bought 100 shares of Goldman Sachs stock @ $178.10 per share 
05/22/2020 Sold 1 June 19th, 2020 $170.00 Call option @ $12.06 per share
Note: The Open Interest in these Calls was 991 contracts and the Implied Volatility was 38.4.
05/29/2020 Ex-dividend of $1.25 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,604.67
= ($178.10 - $12.06) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$1,206.00
= ($12.06 * 100 shares)
(b) Dividend Income: +$125.00
= $1.25 per share x 100 shares 
(c) Capital Appreciation (If GS stock is above $170.00 strike price at the June 19th expiration): -$810.00
= ($170.00 - $178.10) * 100 shares

Total Net Profit: +$521.00
= (+$1,206.00 options income +$125.00 dividend income -$810.00 capital appreciation)

Absolute Return: +3.1%
= +$521.00/$16,604.67
Equivalent Annualized Return: +39.5%
= (+$521.00/$16,604.67)*(365/29 days)


3. International Paper Inc. (IP) -- New Covered Calls Position

The buy/write transaction was as follows:
05/22/2020 Bought 200 shares of International Paper stock @ $32.61 per share 
05/22/2020 Sold 2 June 19, 2020 $30.00 Covered Calls @ $2.91 per share
Note 1: the Implied Volatility of the Call options was 34.3
05/26/2020 Ex-dividend of $.5125 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $5,941.34
= ($32.61 - $2.91) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$582.00
= ($2.91 * 200 shares)
(b) Dividend Income: +$102.50
= $.5125 per share x 200 shares 
(c) Capital Appreciation (If IP stock is above $30.00 strike price at the June 19th expiration): -$522.00
= ($30.00 - $32.61) * 200 shares

Total Net Profit: +$162.50
= (+$582.00 options income +$102.50 dividend income -$522.00 capital appreciation)

Absolute Return: +2.7%
= +$162.50/$5,941.34
Equivalent Annualized Return: +34.4%
= (+$162.50/$5,941.34)*(365/29 days)

Established Covered Calls Position in Tyson Foods Inc. Using the Dividend Capture Strategy

Today a Covered Calls position was established in Tyson Foods Inc. (ticker symbol TSN) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $59.24 and two June 19th, 2020 Call options were sold at $5.04 at the $55.00 strike price.

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a $.42 per share ex-dividend on May 29th is prior to the June 19th options expiration date.  Importantly to the Covered Calls Advisor's analysis, all ten criteria of the  Dividend Capture Strategy (see table at end of this post) are met with this position.  The Covered Calls Advisor's current Overall Market Meter outlook remains Bearish meaning that my best estimate is that the stock market will be lower a month from today.  If so, the appropriate Covered Calls strategy is to sell in-the-money strike prices.  The hope is that even if the stock market declines during the next month, the decline will be a moderate one and the stock price of Tyson Foods will not decline below its $55.00 strike price at closing on the June 19th options expiration date, in which case the maximum potential profit in this Tyson Foods position would be achieved even as the stock market declines.   

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

•  +1.5% absolute return (equivalent to +67.3% annualized return for the next 8 days) if the stock is assigned early (business day prior to the May 29th ex-dividend date); OR 

• +2.3% absolute return (equivalent to +27.4% annualized return over the next 30 days) if the stock is assigned on the June 19th options expiration date.

Tyson Foods Inc. (TSN) -- New Covered Calls Position
The transactions are:

05/21/2020 Bought 200 Tyson Foods shares @ $59.24
05/21/2020 Sold 2 Tyson Foods 6/19/2020 $55.00 Call options @ $5.04
Note: a simultaneous buy/write transaction was executed.
05/29/2020 Upcoming quarterly ex-dividend of $.42 per share

Two possible overall performance results (including commissions) for this Tyson Foods Covered Calls position are as follows:
Covered Calls Cost Basis: $10,841.34
= ($59.24 - $5.04) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,008.00
= ($5.04 * 200 shares)
(b) Dividend Income (If option exercised early on May 28th, the business day prior to the May 29th ex-div date): +$0.00; or
(b) Dividend Income (If Tyson Foods stock assigned at June 19th, 2020 options expiration): +$84.00
= ($.42 dividend per share x 200 shares)

(c) Capital Appreciation (If Tyson Foods Call options assigned early on May 28th): -$848.00
+($55.00 - $59.24) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $55.00 strike price at options expiration): -$848.00
+($55.00 - $59.24) * 200 shares

1. Total Net Profit [If option exercised on May 28th (business day prior to the May 29th ex-dividend date)]: +$160.00

= (+$1,008.00 options income +$0.00 dividend income -$848.00 capital appreciation); or

2. Total Net Profit (If Tyson Foods shares assigned at $55.00 at June 19th, 2020 expiration): +$244.00

= (+$1,008.00 +$84.00 -$848.00)

1. Absolute Return [If option exercised on May 28th (business day prior to ex-dividend date)]: +1.5%

= +$160.00/$10,841.34

Annualized Return (If option exercised early): +67.3%

= (+$160.00/$10,841.34)*(365/8 days); or

2. Absolute Return (If Tyson Foods shares assigned at $55.00 at June 19th, 2020 options expiration): +2.3%

= +$244.00/$10,841.34

Annualized Return (If Tyson Foods shares assigned at $55.00 at June 19th, 2020 expiration): +27.4%

= (+$244.00/$10,841.34)*(365/30 days)

Either outcome provides a very satisfactory return-on-investment result for this Tyson Foods investment.  These returns will be achieved as long as the stock is above the $55.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $53.78 ($59.24 -$5.04 -$.42) provides 9.2% downside protection below today's stock purchase price.

At least eight of the ten metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position.  As shown below with this Tyson Foods position, all ten criteria are met.

Covered Calls Position Established in Discover Financial Services

A new Covered Calls position was established in Discover Financial Services (ticker DFS) with a June 19th, 2020 options expiration date.  As with the Applied Materials position established earlier this morning, Discover goes ex-dividend tomorrow so capturing this dividend is included in the potential return-on-investment results detailed below.  The Covered Calls Advisor gives a shout out to a subscriber (Thank You Harry), who emailed and suggested considering an in-the-money Covered Calls position in Discover.  

Three hundred shares of Discover were purchased at $40.70 and 3 June 19th, 2020 $35.00 strike price Call options were sold at $6.52, so a time value of $.82 [$6.52 - ($40.70 - $35.00)] per share.  The Implied Volatility of these Call options was at a surprisingly high level (approximately 60) given that there is no earnings report prior to the June 19th options expiration date; so selling these options provided an attractive options premium income. Given the Covered Calls Advisor's Bearish overall market outlook, a  conservative in-the-money Covered Calls position was established with a Delta (which provides a good approximation of the probability of assignment at expiration) of 79.5%.    

A potential return-on-investment result if this position closes in-the-money at the June 19th options expiration date is +3.7% absolute return in 32 days (equivalent to a +42.0% annualized return-on-investment).   


Discover Financial Services (DFS) -- New Covered Calls Position

The transactions were as follows:
05/19/2020 Bought 300 shares of Discover Financial Services @ $40.70 per share 
05/19/2020 Sold 3 Discover June 19th, 2020 $35.00 Call options @ $6.52 per share
05/20/2020 Ex-dividend date at $.44 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $10,256.01
= ($40.70 - $6.52) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,956.00
= ($6.52 * 300 shares)
(b) Dividend Income: +$132.00
= $.44 per share x 300 shares 
(c) Capital Appreciation (If Discover stock is above $35.00 strike price at the June 19th options expiration): -$1,710.00
= ($35.00 -$40.70) * 300 shares

Total Net Profit: +$378.00
= (+$1,956.00 options income +$132.00 dividend income -$1,710.00 capital appreciation)

Absolute Return: +3.7%
= +$378.00/$10,256.01
Equivalent Annualized Return: +42.0%
= (+$378.00/$10,256.01)*(365/32 days)

These returns will be achieved as long as the stock is above the $35.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.74 ($40.70 -$6.52 -$.44) provides 17.1% downside breakeven protection below today's purchase price.

Covered Calls Position Established in Applied Materials Inc.

A new Covered Calls position was established in Applied Materials Inc. (ticker AMAT) with a May 29th, 2020 options expiration date.  Three hundred shares of Applied Materials were purchased at $54.21 and 3 Call options were sold at $2.95 per share at the $52.00 strike price.  These Calls had a good Open Interest of 643 contracts, so the Bid/Ask spread was a reasonably tight $.20 when this Buy/Write transaction was executed.  Given the Covered Calls Advisor's Bearish overall market outlook, a moderately in-the-money Covered Calls position was established with a Delta (a good approximation of the probability of assignment at expiration) of 73.6%.  There is an ex-dividend date tomorrow of $.22 per share, so capturing this dividend is included in the details below.      

A potential return-on-investment result if this position closes in-the-money at the May 29th options expiration date is +1.9% absolute return in 11 days (equivalent to a +62.1% annualized return-on-investment).  


Applied Materials Inc. (AMAT) -- New Covered Calls Position

The transactions were as follows:
05/19/2020 Bought 300 shares of Applied Materials Inc. @ $54.21 per share 
05/19/2020 Sold 3 Applied Materials May 29th, 2020 $52.00 Call options @ $2.95 per share
Note: the Implied Volatility of the Call option was 42.3 and the next quarterly earnings report is after the 5/29/2020 expiration date
05/20/2020 Ex-dividend date at $.22 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $15,380.01
= ($54.21 - $2.95) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$885.00
= ($2.95 * 300 shares)
(b) Dividend Income: +$66.00
= $.22 per share x 300 shares 
(c) Capital Appreciation (If Applied Materials stock is above $52.00 strike price at the May 29th options expiration): -$663.00
= ($52.00 -$54.21) * 300 shares

Total Net Profit: +$288.00
= (+$885.00 options income +$66.00 dividend income -$663.00 capital appreciation)

Absolute Return: +1.9%
= +$288.00/$15,380.01
Equivalent Annualized Return: +62.1%
= (+$288.00/$15,380.01)*(365/11 days)

These returns will be achieved as long as the stock is above the $52.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $51.04 ($54.21 -$2.95 -$.22) provides 5.8% downside breakeven protection below today's purchase price.

Closed Covered Calls Position in Morgan Stanley

At the May options expiration last Friday, the Covered Calls position in Morgan Stanley expired with the stock price below the $37.50 strike price. Today, the price of Morgan Stanley spiked higher along with the overall stock market and the Covered Calls Advisor decided to sell the 300 shares in the Covered Calls Advisor Portfolio. You might recall that this Covered Calls position was initiated at the May 15th, 2020 $35.00 strike price and when Morgan Stanley shares had increased beyond $40.00 per share, a decision was made to roll up the short Calls to the $37.50 strike price and with the same May 15th expiration date.

As detailed below, the return-on-investment result for this Morgan Stanley Covered Calls position was +11.9% absolute return in 32 days (equivalent to a +136.1% annualized return-on-investment).  


Morgan Stanley (MS) -- Covered Calls Position Closed Out
The transactions were:
04/16/2020 Bought 300 Morgan Stanley shares @ $37.23
Note: this stock price was down 3.0% from yesterday's closing price (and the Dow was down about 200 points) this morning when this transaction executed.
04/16/2020 Sold 3 Morgan Stanley 5/15/2020 $35.00 Call options @ $3.73
Note: a simultaneous buy/write transaction was executed and the Implied Volatility of the MS 5/15/2020 $35.00 Call options that were sold was substantially higher at 58.9 than the current CBOE S&P 500 Volatility Index (VIX) at 41.7 (which continues to also be very high relative to its historic average around 16).
04/28/2020 Bought-to-Close 3 MS 5/15/2020 $35.00 Call options @ $5.16 per share
04/28/2020  Sold-to-Open 3 MS 5/15/2020 $37.50 Call options @ $3.09 per share
Note: this was a simultaneous roll up transaction
04/29/2020 Quarterly ex-dividend of $.35 per share x 300 shares
05/15/2020 Three MS 5/15/2020 $37.50 Call options expired with the stock price at $37.29, below the $37.50 strike price.  So the 300 shares of MS remained in the Covered Calls Advisor Portfolio.
05/18/2020 Sold the 300 shares of MS at $39.23 per share.

The overall performance result (including commissions) for this Morgan Stanley Covered Calls position was as follows:
Covered Calls Cost Basis: $10,052.01
= ($37.23 - $3.73) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$493.98
= ($3.73 - $5.16 + $3.09) * 300 shares - $4.02 commissions
(b) Dividend Income: +$105.00
= ($.35 dividend per share x 300 shares)

(c) Capital Appreciation (Morgan Stanley shares sold at $39.23 per share): +$600.00
+($39.23 - $37.23) * 300 shares

Total Net Profit: +$1,198.98

= (+$493.98 +$105.00 +$600.00)

Absolute Return on Investment: +11.9%

= +$1,198.98/$10,052.01

Annualized Return: +136.1%

= (+$1,198.98/$10,052.01)*(365/32 days)

Capturing Real-Time Options Information

I have received several emails recently from readers who are interested in how I obtain real-time information during the trading day on the stocks and options I am following.  Below is a window on my Schwab StreetSmart Edge platform -- the primary tool I use daily for monitoring positions.  I have customized the screen layout to facilitate that information most useful for my preferred Covered Calls style of investing.  The image below shows one window from my computer screen (for Alphabet Inc.).  Your broker will likely have a platform similar to this that will aid you in your options-related investing.

For any particular company, you can quickly look at all its options chains (both Calls and Puts) and for any options expiration date.  The image below is for the June 19th, 2020 expiration and the Call options chain column headings layout I have established for each strike price are Last Price, Bid & Ask prices, Today's Contracts Volume Traded, # Contracts Open Interest, Implied Volatility at the Bid Price, Delta, Time Value, and Probability % In-the-Money.  These columns were chosen as the most important factors to consider in the expiration date and strike price selection process.  Also, before placing a trade, I quickly compare the time value in the Calls versus that of the comparable Puts to see if there is any time value arbitrage opportunity in establishing a Covered Calls or a Cash-Secured Puts position.

I hope you find this post helpful, but I want to keep it brief; so I won't continue with more detailed explanations now.  But after reviewing and thinking about it, if you have any comments or questions please email me at partlow@cox.net and I will be happy to reply.

Best Wishes and Stay Safe, 
Jeff

May 15th, 2020 Options Expiration Results

The Covered Calls Advisor Portfolio had eight positions with May 15th, 2020 options expirations. Six of the positions closed in-the-money and two closed out-of-the-money.  For the six closed positions the maximum potential return-on-investment results were achieved as follows:   

• Alibaba Group Holdings (BABA) -- +1.7% absolute return (equivalent to +40.7% annualized return on investment) for the 15 days of this investment
• Alphabet Inc. (GOOGL) -- +2.3% absolute return (equivalent to +33.0% annualized) for the 25 days of this investment  
• Baidu Inc. (BIDU) -- +2.8% absolute return (equivalent to +41.4% annualized) for the 25 days of this investment
• Constellation Brands Inc. (STZ) -- +2.7% absolute return (equivalent to +42.2% annualized) for the 23 days of this investment  
• Intel Corporation (INTC) -- +1.7% absolute return (equivalent to +33.6% annualized) for the 19 days of this investment
• New Oriental Education and Technology Inc. (EDU) -- +3.7% absolute return (equivalent to +51.9% annualized) for the 26 days of this investment

Since the prior monthly options expiration date of April 17th, the S&P 500 has declined by 0.1% (from 286.64 on 4/17 to 286.26 at the market close on 5/15), so achieving the results shown above for six closed positions is a very good result for these May 15th options expiration positions.

The other two positions (Morgan Stanley and ProShares Short S&P 500 ETF) closed with the equity price below the strike price at the May 15th, 2020 options expiration.  The Morgan Stanley $37.50 strike options closed at $37.29 per share and the ProShares Short S&P 500 ETF $25.00 strike options closed at $24.48.  So, the options expired and the shares are now owned in the Covered Calls Advisor Portfolio.  A decision will be made very soon (probably this Monday) to either sell the shares or to continue with Covered Calls positions by selling Call options against the shares currently held.  As always, the detailed results from these positions will be posted on this blog on the same day that the positions are closed out. 

There are currently only four positions in the Covered Calls Advisor Portfolio (see right sidebar).  The cash now available will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  New positions will likely be for next month's options expiration date of June 19th, 2020.  Since the overwhelming majority of 1st quarter corporate earnings have now been reported, it is likely that most new positions will be established this week.  Given the Covered Calls Advisor's Overall Market Meter outlook of  'Bearish', new positions will be hedged by establishing Covered Calls at moderately in-the-money strike prices that provide substantial downside protection.     

As always, please email me at partlow@cox.net with any questions or comments related specifically to this blog or to Covered Calls investing in general.

Best Wishes and Stay Safe,
Jeff Partlow


For educational purposes, I thought you might want to review details of the transactions as well as the return-on-investment calculations. From the six closed positions above, I've included one example of a Covered Calls position (Constellation Brands Inc.) and one of a 100% Cash-Secured Puts position (Baidu Inc.) below:

1. Constellation Brands Inc. (STZ) -- Covered Calls Position Closed on Options Expiration Date
The transactions were:
04/23/2020 Bought 200 Constellation Brands shares @ $153.48
04/23/2020 Sold 2 Constellation Brands 5/15/2020 $140.00 Call options @ $16.38
Note: the Implied Volatility of these Calls was very high at 52.6 when this transaction was executed.
05/04/2020 Quarterly ex-dividend of $.75 per share
05/15/2020  2 STZ May 15th $140.00 Call options were assigned (i.e. sold) at options expiration at the $140.00 strike price.

The overall performance results (including commissions) for this Constellation Brands Covered Calls position were as follows:
Covered Calls Cost Basis: $27,421.34
= ($153.48 - $16.38) *200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$3,276.00
= ($16.38 * 200 shares)
(b) Dividend Income: +$150.00
= ($.75 dividend per share x 200 shares)

(c) Capital Appreciation: -$2,696.00
+($140.00 assignment price - $153.48 stock purchase price) * 200 shares

Total Net Profit: +$730.00

= (+$3,276.00 options income +$150.00 dividend income -$2,696.00 capital appreciation)

Absolute Return: +2.7%

= +$730.00/$27,421.34

Annualized Return (If STZ shares assigned at $140.00 at May 15th, 2020 expiration): +42.2%

= (+$730.00/$27,421.34)*(365/23 days)

2. Baidu Inc. (BIDU) -- 100% Cash-Secured Puts Position Closed on Options Expiration Date

The transactions were:
04/21/2020 Sold 3 BIDU May 15th, 2020 $90.00 100% Cash-Secured Put options @ $2.55 per share 
Note: The Puts were sold when the stock was trading at $99.47 per share.
05/15/2020 3 BIDU May 15th $90.00 Sold Puts were out-of-the-money (stock price above the strike price) at options expiration so the Put options expired and the position was therefore closed out.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $27,002.01
= $90.00 per share * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$765.00
= ($2.55 * 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($90.00 -$90.00) * 300 shares

Total Net Profit: +$765.00
= (+$765.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.8%
= +$765.00/$27,002.01
Equivalent Annualized Return: +41.4%
= (+$765.00/$27,002.01)*(365/25 days)

Established a New Position in Micron Technology Inc.

Today, a new position was established in Micron Technology Inc. (ticker MU) by selling three June 19, 2020 100% Cash-Secured Put options at the $40.00 strike price.  The Implied Volatility of the Put options was very high at 57.3 when this position was established; so the $1.38 per share price received when the Puts were sold is a very nice premium to receive for these out-of-the-money Put options (i.e. strike price below the current stock price).  Importantly, the next quarterly earnings report is on June 25th which is after the June 19th options expiration date.  Reuters Research indicates that 27 analysts have a Buy or Outperform rating, 6 have a Hold, and 1 has a Strong Sell and their average target price is $60.

As detailed below, for this position there is potential for a +3.4% absolute return in 38 days (equivalent to a +33.1% annualized return-on-investment).


Micron Technology Inc. (MU) -- New 100% Cash-Secured Puts Position

This position was established when the price of Micron Technology Inc. was $44.42 (10.0% downside protection to the strike price) and 38 days remaining until the options expiration date.

The transaction today was as follows:
05/13/2020  Sold 3 MU June 19th, 2020 $40.00 100% Cash-Secured Put options @ $1.38

The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $12,002.01
= $40.00 *300 shares + $2.01 commission

Net Profit:
(a) Options Income: +$414.00
= ($1.38 *300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron Technology Inc. is above $40.00 strike price at the June 19th expiration): +$0.00
= ($40.00-$40.00) *300 shares

Total Net Profit (If Micron stock price is above $40.00 strike price at options expiration): +$414.00
= (+$414.00 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Micron stock price is above $40.00 strike price at June 19th options expiration) : +3.4%
= +$414.00/$12,002.01
Annualized Return: +33.1%
= (+$414.00/$12,002.01)*(365/38 days)

The downside 'breakeven price' at expiration is at $38.62 ($40.00 - $1.38), which is 13.1% below the current market price of $44.42.

The probability of making a profit (if held until the June 19th, 2020 options expiration) for this Micron Technology Inc. short Puts position is 74.6%.  Using this probability of profit, the expected value annualized return-on-investment (if held until expiration) is +24.7% (+33.1% * 74.6%), a satisfactory risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $45.80 ($44.42 + $1.38).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the June 19th, 2020 options expiration date rather than selling these Put options.

Early Assignment of iShares MSCI Emerging Markets ETF Covered Calls

Early this morning the Covered Calls Advisor received notifications from my broker (Schwab) that all 5 iShares MSCI Emerging Markets ETF (ticker symbol EEM) Call options were exercised early, so the 500 shares of iShares MSCI Emerging Markets ETF in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $32.00 strike price. 

Details of the transactions and the results for this iShares MSCI Emerging Markets ETF position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $.56 = [$3.45 options premium - ($34.89 EEM price - $32.00 strike price).  By yesterday's market close, the time value had declined to $0.01 and an owner of 5 EEM May 15th $32.00 Call options chose to exercise their option to buy four days prior to the May 15th options expiration date.  The per share price had increased from $34.89 when the position was originally established (on April 21st) to $36.60 at yesterday's market close.  As a result of this early assignment, the Covered Calls Advisor achieved the full $.56 options income profit per share, and this outcome was achieved 4 days prior to the options expiration date this Friday.  As detailed below, this early assignment provided an attractive return-on-investment (roi) result for the Covered Calls Advisor Portfolio of +1.8% absolute return (equivalent to +30.9% annualized return-on-investment for the 21 days this position was held. 

The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls (or 100% Cash-Secured Puts) position is established.  As always, the transactions details for all new positions will be posted on this blog site the same day that they occur.

The detailed results for this EEM Covered Calls position are provided below.


iShares MSCI Emerging Markets ETF (EEM) -- New Covered Calls Position

The transactions were as follows:
04/21/2020 Bought 500 shares of iShares Emerging Markets ETF @ $34.89 per share 
04/21/2020 Sold 5 EEM May 15, 2020 $32.00 Call options @ $3.45 per share
Note: this was a simultaneous Buy/Write transaction.
05/11/2020 Early exercise of 5 EEM May 15th, 2020 $32.00 Call options, so 500 iShares MSCI Emerging Markets ETF shares were assigned (i.e. sold) at the $32.00 strike price.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $15,723.35
= ($34.89 - $3.45) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$1,725.00
= ($3.45 * 500 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (Early assignment of 500 EEM shares at $32.00 strike price): -$1,445.35
= ($32.00 - $34.89) * 500 shares - $.35 commission

Total Net Profit: +$279.65
= (+$1,725.00 options income +$0.00 dividend income -$1,445.35 capital appreciation)

Absolute Return: +1.8%
= +$279.65/$15,723.35
Equivalent Annualized Return: +30.9%
= (+$279.65/$15,723.35)*(365/21 days)

Established Covered Calls in Exelon Corporation

Today, a Covered Calls position was established in Exelon Corporation (ticker symbol EXC) with a June 19th, 2020 expiration and at the $35.00 strike price.  Exelon is a very large electric utilities holding company.  This position has an upcoming quarterly ex-dividend this week on May 14th of $.3825 per share (equivalent to a 4.2% annual dividend yield) which is included in the potential return-on-investment result detailed below.  Quarterly earnings were reported last Friday, so the next earnings report will not be until August.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Bearish, an in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +3.8% absolute return (equivalent to +34.3% annualized return for the next 40 days) if the stock is assigned on the June 19th options expiration date. 

Normally, Utilities sector companies are relatively unattractive to the Covered Calls Advisor since their sales and earnings are much more stable and predictable compared with other market sectors.  Consequently, the potential returns that can be achieved by selling options (either Covered Calls or Cash-Secured Puts) in Utilities companies has been well below average.  But because of the elevated options Implied Volatility now available as a result of the market uncertainty from the current Covid-19 pandemic and also by capturing the upcoming dividend payment, there is an attractive +34.3% annualized return potential for this Exelon Covered Calls position.  


Exelon Corporation (EXC) -- New Covered Calls Position

The transactions were:
05/11/2020 Bought 300 Exelon shares @ $36.80
05/11/2020 Sold 3 Exelon 06/19/2020 $35.00 Call options @ $2.70
Note: a simultaneous buy/write transaction was executed.
05/14/2020 Upcoming quarterly ex-dividend of $.3825 per share

A possible overall performance result (including commissions) for this Exelon Covered Calls position is as follows:
Covered Calls Cost Basis: $10,232.01
= ($36.80 - $2.70) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$810.00
= ($2.70 * 300 shares)
(b) Dividend Income (If Exelon shares assigned at June 19th, 2020 expiration): +$114.75
= +($.3825 dividend per share x 300 shares)

(c) Capital Appreciation (If EXC shares assigned at $35.00 strike price at options expiration): -$540.00
= +($35.00 - $36.80) * 300 shares

Total Net Profit (If Exelon shares assigned at $35.00 at June 19, 2020 expiration): +$384.75

= (+$810.00 options income +$114.75 dividend income -$540.00 capital appreciation)

Absolute Return (If Exelon shares assigned at $35.00 at June 19th, 2020 expiration): +3.8%

= +$384.75/$10,232.01

Annualized Return: +34.3%

= (+$384.75/$9,832.01)*(365/40 days)

Covered Calls Position Closed in Wells Fargo & Co.

The Covered Calls Advisor decided to close the existing Wells Fargo & Co. (ticker symbol WFC) Covered Calls position prior to the May 15th, 2020 options expiration date.  Wells Fargo went ex-dividend today at $.51 per share, so the dividend was captured in the Covered Calls Advisor Portfolio.

As detailed below, this position was closed at a net loss of $243.00.  The stock price declined below the $27.50 strike price, likely as a direct result of two negative news items related to Wells Fargo that occurred since this position was established one week ago: (1) some analysts indicated they now believe there is a likelihood that Wells Fargo will cut its dividend beginning next quarter; and (2) Wells Fargo has been notified that Federal Government agencies will be conducting a probe into Wells Fargo's management of their portion of the Payroll Protection Program for small businesses.

Rather than trying to repair this Covered Calls position by gradually nursing it back to profitability over the next month or more, the Covered Calls Advisor decided it is better to limit losses by liquidating the position now.  It it unrealistic to expect all positions to end profitably.  The Covered Calls Advisor has learned that significant outperformance of the overall market is achieved when the objective of being profitable on 67% or more of positions is achieved.  Given the current status of the remaining nine positions in the Covered Calls Advisor Portfolio (see right sidebar of this blog), there is a very good likelihood this objective will be achieved once again at this month's options expiration on May 15th.

With the cash now available from selling out of Wells Fargo, consideration is now being given to investing the proceeds in a new Covered Calls position in another large bank stock with a June 19th, 2020 options expiration.  Both Bank of America and Goldman Sachs have already declared upcoming ex-dividend dates that are prior to the June monthly options expiration date, so the Covered Calls Advisor's Dividend Capture Strategy could be used again with one or both of those companies.       

As detailed below, the result from this Wells Fargo position was a -3.0% absolute return-on-investment (equivalent to -155.9% on an annualized basis) for the 7 days this position was held.

Wells Fargo & Co. (WFC) -- Closed Out this Covered Calls Position
The transactions were:

04/30/2020 Bought 300 Wells Fargo Bank shares @ $28.94
04/30/2020 Sold 3 Wells Fargo 5/15/2020 $27.50 Call options @ $1.86
05/07/2020 Quarterly ex-dividend of $.51 per share
05/07/2020 Sold 300 shares WFC stock @ $26.02 per share and simultaneously bought-to-close 3 May 15th, 2020 $27.50 Call options at $.26 per share.

The overall performance result (including commissions) for this Wells Fargo Covered Calls position was as follows:
Covered Calls Cost Basis: $8,126.01
= ($28.94 - $1.86) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$480.00
= (+$1.86 - $.26) * 300 shares
(b) Dividend Income: +$153.00
= ($.51 dividend per share x 300 shares)

(c) Capital Appreciation (WFC shares sold at $26.02): -$876.00
+($26.02 - $28.94) * 300 shares

Total Net Profit (Covered Calls Position liquidated): -$243.00

= (+$480.00 +$153.00 -$876.00)

Absolute Return: -3.0%

= -$243.00/$8,126.01

Annualized Return: -155.9%

= (-$243.00/$8,126.01)*(365/7 days)

New Position Established in ProShares Short S&P 500 ETF

Late this morning, when the S&P 500 (ticker SPY) had risen by 1.8% from yesterday's close to $288.63, the Covered Calls Advisor wanted to establish a small contrarian position on the direction of the overall stock market.  During the past six weeks since the March 23rd closing low of 222.95, SPY has risen dramatically by 29.5%, a level that I believe is at the high end of its reasonable range.  Given the likely gradual, prolonged economic recovery forthcoming, a pullback from this current level of the S&P 500 seems most likely in the near-term future.   

With SPY at $288.63 per share, establishing one in-the-money Covered Call on SPY would have required about a $25,000 cost basis investment.  But I only wanted to establish a smaller position today not exceeding about $10,000.  Fortunately, instead of SPY, I could obtain a comparable position to a SPY Covered Call but with much less cash outlay by investing via ProShares Short S&P 500 ETF (ticker SH).  SH is an "inverse" ETF, meaning that it tracks SPY in the opposite direction -- it moves down by almost exactly the same percentage as SPY moves up (and vice versa).   So, SPY in-the-money (strike price below the equity price) Covered Calls are comparable to selling in-the-money (equity price above the stock price) cash-secured Put options. However, the price per share of SH is less than 10% that of SPY.  So, when SH was trading at $24.31 per share (and SPY was $288.63), the Covered Calls Advisor sold 4 SH May 15th, 2020 $25.00 100% cash-secured Put options at $.95 per share and at a total cost close to the approximate $10,000 investment that was preferred.

Although there are an unlimited number of possible return-on-investment outcomes (depending on the price of SH at options expiration on May 15th), in order to provide you a better understanding of the potential results from this position, the return-on-investment results under three different scenarios are provided below: (1) If SH increases by 3.0% (i.e. SPY decreases by 3.0%); (2) If SH decreases by 3.0% (SPY increases by 3.0%); and (3) If SH price is unchanged at $24.31 (SPY price unchanged at $288.63).


As detailed below, the return-on-investment results for each of these three scenarios is: 

1. If SH increases by 3.0% (SPY decreases by 3.0%) -- +3.8% absolute return in 11 days (equivalent to a +126.1% annualized return-on-investment)
2. If SH decreases by 3.0% (SPY increases by 3.0%) -- -1.9% absolute return in 11 days (equivalent to a -62.4% annualized return-on-investment)
3. If SH is unchanged at $24.31 (SPY unchanged at $288.63) -- +1.0% absolute return in 11 days (equivalent to a +34.5% annualized return-on-investment)

ProShares Short S&P 500 ETF (SH) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
05/05/2020 Sold 4 SH May 15th, 2020 $25.00 100% Cash-Secured Put options @ $.95 per share 
Note: The Open Interest in these Puts was 2,434 contracts

Three possible overall performance results (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $10,002.68
= $25.00 per share * 400 shares + $2.68 commissions

1. If SH increases by 3.0% (SPY decreases by 3.0%): Price per share of SH at options expiration is $25.04 = ($24.31 + 3.0%)
Net Profit Components:
(a) Options Income: +$380.00
= $.95 * 400 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SH is above $25.00 strike price at May 15th expiration): +$0.00
= ($25.00 - $25.00) * 400 shares

Potential Total Net Profit (If SH is above $25.00 strike price at May 15th options expiration): +$380.00
= (+$380.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +3.8%
= +$380.00/$10,002.68
Equivalent Annualized Return: +126.1%
= (+$380.00/$10,002.68)*(365/11 days)


2. If SH decreases by 3.0% (SPY decreases by 3.0%): Price per share of SH at options expiration is $23.58 = ($24.31 - 3.0%)
Net Profit Components:
(a) Options Income: +$380.00
= $.95 * 400 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SH decreases by 3.0%): -$568.00
= [$23.58 price per share of SH at options expiration - $25.00 price of shares assigned (i.e. purchased) at options expiration)] * 400 shares

Potential Total Net Profit (If SH declines to $23.58 at May 15th options expiration): -$188.00
= (+$380.00 options income +$0.00 dividend income - $568.00 capital appreciation)

Absolute Return: -1.9%
= -$188.00/$10,002.68
Equivalent Annualized Return: -62.4%
= (-$188.00/$10,002.68)*(365/11 days)


3. If SH price is unchanged:  $24.31 price per share of SH at options expiration
Net Profit Components:
(a) Options Income: +$380.00
= $.95 * 400 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SH is unchanged at $24.31 per share at May 15th expiration): -$276.00
= [$24.31 at expiration - $25.00 price of shares assigned (i.e. purchased) at options expiration)] * 400 shares

Potential Total Net Profit (If SH is unchanged at $24.31 at May 15th options expiration): +$104.00
= (+$380.00 options income +$0.00 dividend income - $276.00 capital appreciation)

Absolute Return: +1.0%
= +$104.00/$10,002.68
Equivalent Annualized Return: +34.5%
= (+$104.00/$10,002.68)*(365/11 days)

The Covered Calls Advisor has invested via Covered Calls for about four decades now and Covered Calls investing has been very good for me (and thus also for my family). Consequently, this blog is written to encourage others to learn about and successfully deploy Covered Calls investing as a primary investing strategy. Hopefully, your reading and fully understanding this particular position is especially helpful to your ongoing understanding of Covered Calls (and their counterpart 100% Cash-Secured Puts). As always, please email me with any comments or questions related to this post or anything else related to Covered Calls investing.

Best Regards, Stay Safe, and Godspeed,

Jeff Partlow

Covered Calls Position Established in Alibaba Group Holdings Ltd.

A new Covered Calls position has been established in Alibaba Group Holdings (ticker BABA) with a May 15th, 2020 options expiration date. Two Alibaba Call options were sold at $11.97 at the $185.00 strike price when the stock price was $193.93.  A moderately in-the-money strike price was chosen because of the Covered Calls Advisor's Overall Market Meter outlook of Bearish.

As detailed below, the potential return-on-investment results are +1.7% absolute return in 15 days (equivalent to a +40.7% annualized return-on-investment).  This is an attractive potential return given that a moderately in-the-money strike price was selected.


Alibaba Group Holdings Ltd. (BABA) -- New Covered Calls Position

The transactions were as follows:
05/01/2020 Bought 200 shares of Alibaba stock @ $193.93 per share 
05/01/2020 Sold 2 Alibaba May 15th, 2020 $185.00 Call options @ $11.97 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 42.4 when this transaction was executed.  This high Implied Volatility is higher than would normally be the case because of the added uncertainty caused by Alibaba's quarterly earnings report which is upcoming on May 14th (the day prior to the options expiration).

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $36,394.07
= ($193.93 - $11.97) * 200 shares + $2.07 commission

Net Profit Components:
(a) Options Income: +$2,394.00
= ($11.97 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $185.00 strike price at May 15th expiration): -$1,786.00
= ($185.00 -$193.93) * 200 shares

Total Net Profit: +$608.00
= (+$2,394.00 options income +$0.00 dividend income -$1,786.00 capital appreciation)

Absolute Return: +1.7%
= +$608.00/$36,394.07
Equivalent Annualized Return: +40.7%
= (+$608.00/$36,394.07)*(365/15 days)

The downside 'breakeven price' at expiration is at $181.96 ($193.93 - $11.97), which is 6.2% below the current market price of $193.93.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the May 15th, 2020 options expiration) for this Alibaba Covered Calls position is 69.4%, so the expected value annualized ROI of this investment (if held until expiration) is +28.2% (+40.7% * 69.4%), a good result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $196.97 = $193.93 + [$11.97 - ($193.93 - $185.00)].
This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the May 15th, 2020 options expiration date rather than establishing this Covered Calls position.