Established Cash-Secured Puts Position in Rackspace Technology Inc.

A new position was established early this morning in Rackspace Technology Inc. (ticker RXT) by selling five September 18th, 2020 100% Cash-Secured Put options at the $17.50 strike price at $.70 per share when the price of Rackspace Technology stock was at $20.69 per share (18.2% above the strike price).  

Rackspace Technology is a multi-cloud services company that just completed its Initial Public Offering earlier this month on August 5th.  It is uniquely positioned as a primarily pure-play company in managed multicloud services with 120,000 customers, 40 data centers, and 2,500 cloud-certified professionals worldwide.  Rackspace is a Gartner 2020 Magic Quadrant "Leader" for Public Cloud Infrastructure and Managed Services.  Impressively, Gartner calls Rackspace "uniquely positioned as a next-generation GSI (Global Systems Integrator)" providing services beyond those of the six hyperscale cloud providers.
Revenue is forecasted to grow at an approximate 14% cagr over the next five years.   

Its first public earnings report will be this afternoon after the market closes.  Normally, the Covered Calls Advisor avoids positions with intervening earnings reports, but the exceptionally high return-on-investment possibility (the implied volatility of the Puts was 104.8 when this positions was transacted) along with eight analysts initiating coverage this morning at an average target price of $28 provides an attractive risk/reward investment opportunity.  Because of the high risk associated with the earnings report after the market close today, the Covered Calls Advisor decided to establish a small but also deep-out-of-the-money (i.e. strike price below the current stock price) initial Cash-Secured Puts position this morning.  So the $346.65 ($.70 per share x 500 shares - $3.35 commission) is a nice premium to receive for these out-of-the-money Put options. 

As detailed below, for this new Rackspace Technology Inc. Cash-Secured Puts position there is potential for a +4.1% absolute return in 19 days (equivalent to a +79.2% annualized return-on-investment).  


Rackspace Technology Inc. (RXT) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:

08/31/2020  Sold 5 Rackspace Technology Inc. September 18th, 2020 $17.50 100% Cash-Secured Put options @ $.70 per share.

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

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $8,403.35
= ($17.50 - $.70) * 500 shares + $3.35 commission

Net Profit:
(a) Options Income: +$346.65
= ($.70 * 500 shares) - $3.35 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Rackspace is above $17.50 strike price at the September 18th expiration): +$0.00
= ($17.50 - $17.50) * 500 shares

Total Net Profit (If Rackspace stock price is above $17.50 strike price at options expiration): +$346.65
= (+$346.65 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If RXT stock is above $17.50 strike price at the Sept 18th options expiration) : +4.1%
= +$346.65/$8,403.35
Annualized Return: +79.2%
= (+$346.65/$8,403.35)*(365/19 days)

The downside 'breakeven price' at expiration is at $16.80 ($17.50 - $.70), which is 18.8% below the current market price of $20.69.

Roll-Up-and-Out Goldman Sachs Group Inc. Covered Call

The Covered Calls Advisor recently established a Covered Call in Goldman Sachs (ticker GS) at the September 4th, 2020 $197.50 strike price.  The price of the 100 Goldman Sachs shares have increased from the purchase price of $201.36 to $209.23 today when this roll-up-and-out transaction was executed.  The $1.25 quarterly ex-dividend is Monday and there was only $.05 [$11.68 Call options price - ($209.13 share price - $197.50 strike price)] of time value remaining in the Sept 4th $197.50 Call options.  With such a low ($.05 per share) time value remaining, it was likely that the Call options owner would choose to exercise their option so that the 100 shares of Goldman Sachs stock owned in the Covered Calls Advisor Portfolio would be assigned (i.e. sold) at the $197.50 strike price to the owner of the Calls.

The Covered Calls Advisor decided to roll up this Covered Calls position from the $197.50 strike to the $205.00 strike at the Sept 18th, 2020 options expiration date for a $7.73 per share premium income. 

A potential return-on-investment result for this Goldman Sachs Covered Calls since its inception on August 18th, 2020  is +3.9% absolute return in 32 days (equivalent to a +44.4% annualized return-on-investment).  By rolling up the original Covered Calls, this result would exceed the +1.4% absolute return for 13 days (+40.7% annualized) that would have been achieved if the stock was assigned early today at the $197.50 strike price.

The detailed transactions and a potential result are provided below.   

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

The buy/write transaction was as follows:
08/18/2020 Bought 100 shares of Goldman Sachs stock @ $201.36 per share 
08/18/2020 Sold 1 Sept 4th, 2020 $197.50 Call option @ $6.68 per share
Note: The Implied Volatility of the Call option was 24.8.
08/28/2020 Bought-to-Close 1 GS 9/04/2020 $197.50 Call option @ $11.68 per share
08/28/2020  Sold-to-Open 1 GS 9/18/2020 $205.00 Call option @ $7.73 per share
Note: this was a simultaneous roll up transaction
08/31/2020 Upcoming quarterly ex-dividend of $1.25 per share

A possible overall performance result (including commissions) for this Goldman Sachs Covered Call position is as follows:
Covered Call Cost Basis: $19,468.67
= ($201.36 - $6.68) * 100 shares + $0.67 commission

Net Profit Components:
(a) Options Income: +$268.31
= ($6.68 - $11.68 + $7.73) * 100 shares - $4.69 commissions
(b) Dividend Income: +$125.00
= ($1.25 dividend per share x 100 shares)

(c) Capital Appreciation (If Goldman Sachs shares assigned at $205.00 strike price at options expiration): +$364.00
+($205.00 - $201.36) * 100 shares

Total Net Profit (If Goldman Sachs shares assigned at $205.00 at Sept 18th, 2020 expiration): +$757.31

= (+$268.31 +$125.00 +$364.00)

Absolute Return (If Goldman Sachs shares assigned at $205.00 at Sept 18th, 2020 options expiration): +3.9%

= +$757.31/$19,468.67

Annualized Return (If Goldman Sachs shares assigned at $205.00 at Sept 18th, 2020 expiration): +44.4%

= (+$757.31/$19,468.67)*(365/32 days)

Established Covered Calls in Boston Scientific Corp.

Today a new Covered Calls position was established in Boston Scientific Corp.(ticker BSX) with a September 18th, 2020 options expiration date.  A a buy/write transaction was made with 300 shares purchased at $29.12 and three Calls sold at the $38.00 strike price for $1.79 per share.  There is no earnings report prior to the next earnings report on October 28th. 

As detailed below, the potential return-on-investment result is +1.7% absolute return in 24 days (equivalent to a +25.6% annualized return-on-investment).

Boston Scientific Corp.(BSX) -- New Covered Calls Position
The Buy/Write transaction was as follows: 08/26/2020 Bought 300 shares of Boston Scientific Corp. stock @ $39.12 per share 
08/26/2020 Sold 3 Boston Scientific Sept 18th, 2020 $38.00 Call options @ $1.75 per share
Note: the Implied Volatility of these Calls was 26.5 today when this transaction was made.

A possible overall performance results (including commissions) if the stock price is above the $38.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $11,213.01
= ($39.12 - $1.75) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$525.00
= ($1.75 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Boston Scientific stock is above $38.00 strike price at Sept 18th expiration): -$336.00
= ($38.00 - $39.12) * 300 shares

Total Net Profit: +$189.00
= (+$525.00 options income +$0.00 dividend income -$336.00 capital appreciation)

Absolute Return: +1.7%
= +$189.00/$11,213.01
Equivalent Annualized Return: +25.6%
= (+$189.00/$11,213.01)*(365/24 days)

The downside 'breakeven price' at expiration is at $37.37 ($39.12 - $1.75), which is 4.5% below the current market price of $39.12.

New Covered Calls Positions Established in Anthem Inc. and Bank of America Corp.

Today, new Covered Calls positions were established in Anthem Inc.(ANTM) and Bank of America Corp.(BAC). Both positions have an intervening ex-dividend (but no earnings report) prior to their options expiration dates, which is included in the return-on-investment details provided below.

Two hundred Anthem Inc. shares were purchased at $268.93 and two $260.00 Sept 18th, 2020 Call options were sold at $12.93, a net debit of $256.00 per share.  Four hundred Bank of America shares were purchased at $25.66 and four $24.50 September 11th, 2020 Call options were sold at $1.35, a net debit of $24.31 per share.

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

• Anthem Inc.: (a) +1.6% absolute return in 14 days (equivalent to a +40.7% annualized return-on-investment) if assigned on the day prior to the 9/9/2020 ex-dividend date; OR (b) +1.9% absolute return in 24 days (equivalent to a +29.4% annualized return-on-investment) if assigned on the day prior to the 9/9/2020 ex-dividend date.
• Bank of America Corp.: (a) +0.8% absolute return in 8 days (equivalent to a +40.7% annualized return-on-investment) if assigned on the day prior to the 9/3/2020 ex-dividend date; OR (b) +1.5% absolute return in 17 days (equivalent to a +32.7% annualized return-on-investment) if assigned on the day prior to the 9/3/2020 ex-dividend date.

1.  Anthem Inc. (ANTM) -- New Covered Calls Position

The buy/write transaction was as follows:
08/26/2020 Bought 200 shares of Anthem stock @ $268.93 per share 
08/26/2020 Sold 2 ANTM Sept 18th, 2020 $260.00 Call options @ $12.93 per share 
Note: The Open Interest in these Calls was 177 contracts and their Implied Volatility was 28.6
09/09/2020 Ex-dividend of $.95 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $51,201.34
= ($268.93 - $12.93) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$2,586.00
= ($12.93 * 200 shares)
(b) Dividend Income (If ANTM shares assigned on 9/08/2020, the business day prior to the ex-dividend date): = +$0.00; or
(b) Dividend Income (If shares assigned at 9/18/2020 options expiration): +$190.00
= $.95 per share x 200 shares
(c) Capital Appreciation (If ANTM shares assigned on 9/8/2020): -$1,786.00
= ($260.00 -$268.93) * 200 shares; or
(c) Capital Appreciation (If shares above $260.00 strike price at Sept 18th options expiration): -$1,786.00
= ($260.00 -$268.93) * 200 shares

1. Potential Net Profit (If Anthem shares assigned early on 9/8/2020, the day prior to the Sept 9th ex-dividend date): +$800.00
= (+$2,586.00 options income +$0.00 dividend income -$1,786.00 capital appreciation)
2. Potential Net Profit (If Anthem price is above $260.00 strike price at Sept 18th options expiration): +$990.00
= (+$2,586.00 options income +$190.00 dividend income - $1,786.00 capital appreciation)

1. Absolute Return (If Anthem Calls exercised early on 9/8/2020, the day prior to the Sept 9th ex-dividend date): +1.6%
= +$800.00/$51,201.34
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +40.7%
= (+$800.00/$51,201.34)*(365/14 days)
2. Absolute Return (If Anthem price is above $260.00 strike price at Sept 18th options expiration): +1.9%
= +$990.00/$51,201.34
Equivalent Annualized Return (If assigned on 9/18/2020 options expiration date): +29.4%
= (+$990.00/$51,201.34)*(365/24 days)


2. Bank of America Corp. (BAC) -- New Covered Calls Position

The buy/write transaction was as follows:
08/26/2020 Bought 400 shares of Bank of America Corp. stock @ $25.66 per share 
08/26/2020 Sold 4 BAC Sept 11th, 2020 $24.50 Call options @ $1.35 per share
Note: The Open Interest in these Calls was 241 contracts and the Implied Volatility was 27.7
09/03/2020 Ex-dividend of $.18 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $9,726.68
= ($25.66 - $1.35) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$540.00
= ($1.35 * 400 shares)
(b) Dividend Income (If BAC shares assigned on 9/02/2020, the business day prior to the ex-dividend date): = +$0.00; or
(b) Dividend Income (If shares assigned at 9/11/2020 options expiration): +$72.00
= $.18 per share x 400 shares
(c) Capital Appreciation (If BAC shares assigned on 9/2/2020): -$464.00
= ($24.50 -$25.66) * 400 shares; or
(c) Capital Appreciation (If shares above $24.50 strike price at Sept 11th options expiration): -$464.00
= ($24.50 -$25.66) * 400 shares

1. Potential Net Profit (If Bank of America shares assigned on 9/2/2020, the day prior to the Sept 3rd ex-dividend date): +$76.00
= (+$540.00 options income +$0.00 dividend income - $464.00 capital appreciation)
2. Potential Net Profit (If BAC price is above $24.50 strike price at Sept 11th options expiration): +$148.00
= (+$540.00 options income +$72.00 dividend income - $464.00 capital appreciation)

1. Absolute Return (If BAC shares assigned on 9/2/2020, the day prior to the Sept 9th ex-dividend date): +0.8%
= +$76.00/$9,726.68
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +35.6%
= (+$76.00/$9,726.68)*(365/8 days)
2. Absolute Return (If BAC price is above $24.50 strike price at Sept 11th options expiration): +1.5%
= +$148.00/$9,726.68
Equivalent Annualized Return (If assigned on 9/11/2020 options expiration date): +32.7%
= (+$148.00/$9,726.68)*(365/17 days)

Established Covered Calls Position in Schlumberger N.V. Using the Dividend Capture Strategy

Today a Covered Calls position was established in Schlumberger (ticker symbol SLB) when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $19.18 and 4 September 18th, 2020 Call options were sold at $1.92 at the $17.50 strike price.   Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, a moderately in-the-money Covered Calls position was established -- the Delta was 79.8, which closely approximates the probability that the Call options will be in-the-money on the options expiration date. In addition, there is an upcoming ex-dividend of $.125 per share on September 1st which provides an annual dividend yield of 2.6% at the current stock price of $19.18.  Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the August 14th options expiration date.

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

•  +1.4% absolute return (equivalent to +72.5% annualized return-on-investment for the next 7 days) if the stock is assigned early (business day prior to the September 1st ex-dividend date); OR 

• +2.1% absolute return (equivalent to +30.9% annualized return over the next 25 days) if the stock is assigned on the September 18th options expiration date.

Schlumberger N.V. (SLB) -- New Covered Calls Position
The buy/write transaction was:
08/25/2020 Bought 400 Schlumberger shares @ $19.18
08/25/2020 Sold 4 Schlumberger 9/18/2020 $17.50 Call options @ $1.92
Note: the Time Value (aka Extrinsic Value) in the Call options was $.24 per share = [$1.92 Call options premium - ($19.18 stock price - $17.50 strike price)]
09/01/2020 Upcoming quarterly ex-dividend of $.125 per share

Two possible overall performance results (including commissions) for this Schlumberger Covered Calls position are as follows:
Covered Calls Cost Basis: $6,906.68
= ($19.18 - $1.92) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$768.00
= ($1.92 * 400 shares)
(b) Dividend Income (If option exercised early on Aug 31st, the business day prior to the Sept 1st ex-div date): +$0.00; or
(b) Dividend Income (If Schlumberger stock assigned at Sept 18th, 2020 expiration): +$50.00
= ($.125 dividend per share x 400 shares)

(c) Capital Appreciation (If Schlumberger Call options assigned early on Aug 31st): -$672.00
+($17.50 - $19.18) * 400 shares; or
(c) Capital Appreciation (If SLB shares assigned at $17.50 strike price at options expiration): -$672.00
+($17.50 - $19.18) * 400 shares

1. Total Net Profit [If option exercised on Aug 31st (business day prior to Sept 1st ex-dividend date)]: +$96.00

= (+$768.00 options income +$0.00 dividend income -$672.00 capital appreciation); or

2. Total Net Profit (If Schlumberger shares assigned at $17.50 strike price at September 18th, 2020 expiration): +$146.00

= (+$768.00 +$50.00 -$672.00)

1. Absolute Return (If two SLB Call options exercised early on Aug 31st): +1.4%

= +$96.00/$6,906.68

Annualized Return (If options assigned early): +72.5%

= (+$96.00/$6,906.68)*(365/7 days); or

2. Absolute Return (If Schlumberger shares assigned at $17.50 at Sept 18th, 2020 options expiration): +2.1%

= +$146.00/$6,906.68

Annualized Return (If Schlumberger shares assigned at $17.50 at Sept 18th, 2020 expiration): +30.9%

= (+$146.00/$6,906.68)*(365/25 days)

Either outcome provides an attractive return-on-investment result for this Schlumberger investment.  These returns will be achieved as long as the stock is above the $17.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $17.135 ($19.18 -$1.92 -$.125) provides 10.7% downside protection below today's stock purchase price.

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 Schlumberger position, all nine criteria were met.

Established Covered Calls in GoHealth Inc.

Today a new Covered Calls position was established in GoHealth Inc. (ticker GOCO) with a September 18th, 2020 options expiration date.  A relatively small initial position was established with a buy/write transaction of 400 shares purchased at $15.00 and four Calls sold at the $15.00 strike price for $1.05 per share.  There is no earnings report prior to the next earnings report on November 16th. 

GoHealth is one of three publicly-traded telehealth insurance brokers (along with eHealth and Select Quote) with proprietary technology platforms leveraged by machine-learning algorithms from two decades of data to help consumers find the best health insurance plan for their specific needs.  They sell primarily Medicare insurance policies in partnership with the nation's leading health insurers -- so GoHealth has no underwriting risks.  It was founded in 2001, but its Initial Public Offering (IPO) was just over one month ago at $21 per share.  Its co-founders still serve as CEO and Chief Strategy Officer.  Since the IPO, the stock price has declined dramatically.  But with their excellent platforms, strong insurance company partnerships, and use of trained in-house sales agents, GoHealth seems well-positioned for excellent future growth from their Medicare Advantage telesales business. 

As detailed below, the potential return-on-investment result is +7.5% absolute return in 26 days (equivalent to a +105.6% annualized return-on-investment).  Given the substantial price decline since its IPO, this is a risky investment but the Covered Calls Advisor thinks the huge potential returns make the risks worthwhile.  But because of the heightened uncertainty, a relatively small initial investment was made.

GoHealth Inc. (GOCO) -- New Covered Calls Position
The Buy/Write transaction was as follows:
08/24/2020 Bought 400 shares of GoHealth Inc. stock @ $15.00 per share 
08/24/2020 Sold 4 GoHealth Sept 18th, 2020 $15.00 Call options @ $1.05 per share
Note: the Implied Volatility of these Calls was very high at 61.6 today when this transaction was made.

A possible overall performance results (including commissions) if the stock price is above the $15.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $5,582.68
= ($15.00 - $1.05) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$420.00
= ($1.05 * 400 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If GoHealth stock is above $15.00 strike price at Sept 18th expiration): +$0.00
= ($15.00 - $15.00) * 400 shares

Total Net Profit: +$420.00
= (+$420.00 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +7.5%
= +$420.00/$5,582.68
Equivalent Annualized Return: +105.6%
= (+$420.00/$5,582.68)*(365/26 days)

The downside 'breakeven price' at expiration is at $13.95 ($15.00 - $1.05), which is 7.0% below the current market price of $15.00.

Established Cash-Secured Puts Position in Alexion Pharmaceuticals Inc.

A new position was established in Alexion Pharmaceuticals Inc. (ticker ALXN) by selling two September 18th, 2020 100% Cash-Secured Put options at the $95.00 strike price at $1.80 per share when the price of Alexion stock was at $100.93 per share (6.2% above the strike price).  This is a moderately conservative position since the probability of assignment on the options expiration date was 74.0% when this position was established. 

Alexion is a biotech company with a small number of drugs using antibody therapies against rare but severe disorders, including autoimmune disease, cardiovascular disease, inflammation, and cancer.  Analysts expectations for the stock price are bullish.  Fourteen analysts rated the stock as either Buy or Outperform, nine rated it a Hold, and none rated it either Underperform or Sell.  The average one-year target price is $141 (39.7% above the current stock price).

The 36.1 Implied Volatility for these Alexion Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 22.6.   So the $358.66 ($1.80 per share x 200 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options.  Importantly, Alexion reported their 2nd quarter earnings at the end of July, so there is no earnings report prior to the September 18th options expiration date.  Their quarterly earnings were 20% above analysts' estimates and the analysts' estimates for 2020 is for revenue above last year and for earnings of about $11 per share -- a P/E ratio of only about 9.2 based on the current $100.93 stock price.  In addition, further gains in both revenue and earnings are expected for 2021. 

As detailed below, for this new Alexion Pharmaceuticals Inc. Cash-Secured Puts position there is potential for a +1.9% absolute return in 26 days (equivalent to a +27.0% annualized return-on-investment).  


Alexion Pharmaceuticals Inc. (ALXN) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
08/24/2020  Sold 2 Alexion September 18th, 2020 $95.00 100% Cash-Secured Put options @ $1.80 per share.

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

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $18,641.34
= ($95.00 - $1.80) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$358.66
= ($1.80 *200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alexion is above $95.00 strike price at the September 18th expiration): +$0.00
= ($95.00 - $95.00) *200 shares

Total Net Profit (If Alexion stock price is above $95.00 strike price at options expiration): +$358.66
= (+$358.66 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If ALXN is above $95.00 strike price at the Sept 18th options expiration) : +1.9%
= +$358.66/$18,641.34
Annualized Return: +27.0%
= (+$358.66/$18,641.34)*(365/26 days)

The downside 'breakeven price' at expiration is at $93.20 ($95.00 - $1.780), which is 7.7% below the current market price of $100.93.

Continuation of Covered Calls Position in Micron Technology Inc.

Upon the August 21st, 2020 options expiration, the Covered Calls position in Micron Technology Inc. (ticker symbol MU) expired with the stock price below the $47.00 strike price.  So, the Call options expired and 500 shares of Micron stock were retained in the Covered Calls Advisor Portfolio.  Today, with the price of Micron stock at $43.48, a sell-to-open order was executed to sell 5 Sept 4th, 2020 Call options at the $44.00 strike price for $.95 per share to continue this Covered Calls position.


As detailed below, the overall return-on-investment result for this Micron Technology Inc. position if the stock is in-the-money (i.e. above the $44.00 strike price) at expiration is -3.1% absolute return in 24 days (equivalent to a -47.1% annualized return-on-investment).  

The recent swift decline in Micron's stock price resulted from the announcement by the CFO that next quarter's revenue is likely to be below the guidance previously provided because of a current slowdown in enterprise demand for its chips.  The new two-week Covered Calls position will give the Covered Calls Advisor some additional time to determine if this position should be continued in the future or if it should be closed out at a loss.  

The transactions to-date are as follows:
08/12/2020 Bought 500 shares of Micron Technology Inc. stock @ $48.34 per share 
08/12/2020 Sold 5 Micron Aug 21st, 2020 $47.00 Call options @ $1.96 per share
08/21/2020 5 MU 8/21/2020 Calls expired
08/24/2020 5 MU 9/4/2020 $44.00 Calls sold @ $.95 per share to continue Covered Calls position in Micron

A possible overall performance result (including commissions) if the stock price is above the $44.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $23,193.35
= ($48.34 - $1.96) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$1,451.65
= ($1.96 + $.95) * 500 shares - $3.35 commission
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Micron stock is above $44.00 strike price at Sept 4th expiration): -$2,170.00
= ($44.00 - $48.34) * 500 shares

Total Net Profit: -$718.35
= (+$1,451.65 options income +$0.00 dividend income -$2,170.00 capital appreciation)

Absolute Return: -3.1%
= -$718.35/$23,193.35
Equivalent Annualized Return: -47.1%
= (-$718.35/$23,193.35)*(365/24 days)

August 21st, 2020 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had eleven positions since last month's (July 17th, 2020) monthly options expiration date.  The Covered Calls Advisor is pleased that ten of these eleven positions have been closed out profitably.  The results of these ten positions were:

• Four positions expired on the August 21st, 2020 monthly options expiration date with the following results:

1. One Alphabet Inc. (GOOGL) $1,370.00 Cash-Secured-Put option expired since the stock price closed above the strike price on the options expiration date -- +1.5% absolute return in 29 days (equivalent to +18.7% annualized return-on-investment).
2. Two Cigna Corp. (CI) $162.50 Cash-Secured-Put options expired -- +1.6% absolute return in 22 days (equivalent to +26.3% annualized return-on-investment).
3. Two VMware Inc. (VMW) $137.00 Cash-Secured-Puts expired -- +1.3% absolute return in 11 days (equivalent to +41.5% annualized return-on-investment).
4. One D.R. Horton Inc. (DHI) Covered Calls position closed in-the-money, so the 200 shares were assigned (sold) at the $65.00 strike price and achieved +1.4% absolute return in 15 days (equivalent to +34.6% annualized return-on-investment).

• Five Covered Calls positions using the Dividend Capture strategy were assigned early (the day prior to the ex-dividend date in each case) with the following results:

1. Citigroup Inc. (C) -- Four $48.00 Calls -- +0.5% absolute return in 1 day (equivalent to +176.4% annualized return-on-investment).
2. CVS Health Corp. (CVS) -- Three $60.00 Calls -- +1.5% absolute return in 14 days (equivalent to +39.7% annualized return-on-investment).
   
3. IBM Corp. (IBM) -- Two $120.00 Calls -- +0.8% absolute return in 10 days (equivalent to +30.7% annualized return-on-investment).
   
4. Intel Corp. (INTC) -- Two $46.00 Calls -- +0.9% absolute return in 8 days (equivalent to +40.0% annualized return-on-investment).
   
5. Morgan Stanley (MS) -- Four $48.00 Calls -- +0.7% absolute return in 7 days (equivalent to +35.0% annualized return-on-investment).

• One Covered Calls position in Phillips 66 (PSX) at the $62.50 strike price was out-of-the-money on the August 21st, 2020 options expiration date and the position was closed out during the 8/21/2020 trading day.  The results were +0.9% absolute return in 9 days (equivalent to +36.2% annualized return-on-investment).

Although ten of eleven positions were closed out at a profit this month, one Covered Calls position (Micron Technology Inc.) closed out-of-the-money (stock price below the strike price) at the August 21st, 2020 options expiration, so these shares now remain in the Covered Calls Advisor Portfolio (as shown in the right sidebar).  A decision will be made soon to either sell the Micron shares or continue with this Covered Calls position by selling Call options against the shares currently held.  As always, the transactions and return-on-investment results for this position will be posted on this blog site on the same day the transactions occur.

Closed Covered Calls Position in Phillips 66

Today is the options expiration date for the Covered Calls position in Phillips 66.  The 300 shares of PSX stock owned had declined below today's $62.50 strike price and the Covered Calls Advisor decided to close out the position this morning when the stock was at $61.75 and three Calls were at $.17. 

As detailed below, the return-on-investment result for this Phillips 66 Covered Calls position was +0.9% absolute return in 9 days (equivalent to a +36.2% annualized return-on-investment).  This result is a good example of the advantage that can accrue from selling in-the-money Covered Calls using the Covered Calls Advisor's Dividend Capture strategy.  Despite the stock declining by 4.1% (from $64.39 purchase price to $61.75 sale price), a profit was still achieved from this position.

Phillips 66 (PSX) -- Covered Calls Position Closed

The buy/write transaction was:
08/12/2020 Bought 300 Phillips 66 shares @ $64.39
08/12/2020 Sold 3 Phillips 66 8/21/2020 $62.50 Call options @ $2.47
Note: the Time Value (aka Extrinsic Value) in the Call options was $.58 per share = [$2.47 Call options premium - ($64.39 stock price - $62.50 strike price)]
08/17/2020 Quarterly ex-dividend of $.90 per share
08/21/2020 Closed PSX Covered Calls position by simultaneously selling 300 PSX shares and buying-to-close 3 8/21/2020 $62.50 Call options at a net credit of $61.58. 

The overall performance result (including commissions) for this Phillips 66 Covered Calls position was as follows:
Covered Calls Cost Basis: $18,578.01
= ($64.39 - $2.47) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income (Bought-to-Close 3 PSX Call options @ $.17 per share): +$687.99
= ($2.47 - $.17) * 300 shares - $2.01 commission
(b) Dividend Income: +$270.00
= ($.90 dividend per share x 300 shares)

(c) Capital Appreciation (300 PSX shares sold at $61.75): -$792.00
+($61.75 - $64.39) * 300 shares

Total Net Profit: +$165.99

= (+$687.99 options income +$270.00 dividend income -$792.00 capital appreciation)

Absolute Return: +0.9%

= +$165.99/$18,578.01

Annualized Return (If PSX shares assigned at $62.50 at Aug 21st, 2020 expiration): +36.2%

= (+$165.99/$18,578.01)*(365/9 days)

Answers to Quiz #3

I am pleased that twenty-four responses were received to Quiz #3. Everyone had six or more correct answers and four responses were 100% correct. All ten questions were developed from information contained in the first two sections of my favorite book primarily about Covered Calls: "New Insights on Covered Call Writing" by Lehman and McMillan. If you don't already have it, please consider reading it carefully. One place you can get it is here: https://rb.gy/tzahq0

1. Another name for Covered Calls is any one of three answers were possible here: Buy-Write, Covered Write, or Equity Overwrite.

2. Each Call option represents how many shares? _100____

3. The Call owner has the right to buy. The Call seller has the _obligation to sell.

4. When the Call owner exercises their Call option, the Call seller must be assigned (sell) the shares at the strike price_.

5. You established a Covered Call by buying 100 shares of XYZ at $102 and sold a $100 Call option at $4 premium. The net profit if assigned at expiration (excluding commissions) is $_$200 ($2 per share profit x 100 shares)_.

6. If you make a $200 net profit on a $10,000 investment in exactly one month, your annualized return-on-investment is _24%_.

7. The closer to the options expiration date we get, the rate of an option's time value decay increases.

8. To roll out a current Covered Calls position to a future Covered Calls in the same stock, a single  buy-to-close current Calls and sell-to-open future Calls transaction is made.
There was some confusion on what I was asking for here, so I also gave credit to answers such as rollout or rolling.

9. An out-of-the-money Call option has only time value (also known as extrinsic value).

10. Before entering a Covered Calls position on stock XYZ, the best way to compare potential financial results in positions with differing expiration dates is by calculating their annualized return on investment.

Some of the questions on these 3 quizzes have been related to obtaining a better understanding of certain terms related to Covered Calls. I suggest you try searching via Investopedia.com whenever you seek further insight on any specific investing-related term or topic.

As you know, these quizzes are intended only for the purpose of providing information and education for anyone interested in Covered Calls investing. Hopefully, these quizzes have helped you in some way and have encouraged you to want to learn more about Covered Calls investing.  As always, I enjoy receiving your questions or comments about anything related to Covered Calls investing -- at partlow@cox.net

Best Wishes and Stay Safe,
Jeff

Covered Call Established in Goldman Sachs Group Inc. Using Dividend Capture Strategy

Today a Covered Call position was established in Goldman Sachs Group Inc. (ticker symbol GS) when the Covered Calls Advisor's buy/write limit order was executed -- 100 shares were purchased at $201.36 and 1 September 4th, 2020 Call options was sold at $6.68 at the $197.50 strike price. 

There is an upcoming ex-dividend of $1.25 per share (a 2.4% annualized dividend yield) on August 31st.  Two potential return-on-investment results for this position are detailed below (including the possibility of early exercise since the ex-dividend is prior to the September 4th options expiration date).  Given the Covered Calls Advisor's current cautious outlook, an in-the-money Covered Calls position was established -- the Delta was 63.4, which approximates the probability that the Call options will be in-the-money on the options expiration date.  Importantly, there is no earnings report prior to the options expiration date. 

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

•  +1.4% absolute return (equivalent to +40.7% annualized return for the next 13 days) if the stock is assigned early (business day prior to the August 31st ex-dividend date); OR 

• +2.1% absolute return (equivalent to +42.4% annualized return over the next 18 days) if the stock is assigned on the September 4th options expiration date.

This Goldman Sachs Covered Call is the first position in the Covered Calls Advisor Portfolio with a September options expiration date. 

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

The buy/write transaction was as follows:
08/18/2020 Bought 100 shares of Goldman Sachs stock @ $201.36 per share 
08/18/2020 Sold 1 Sept 4th, 2020 $197.50 Call option @ $6.68 per share
Note: The Implied Volatility of the Call option was 24.8.
08/31/2020 Upcoming ex-dividend of $1.25 per share

Two possible overall performance results (including commissions) for this Goldman Sachs Covered Call position are as follows:
Covered Call Cost Basis: $19,468.67
= ($201.36 - $6.68) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$668.00
= ($6.68 * 100 shares)
(b) Dividend Income (If option exercised early on August 28th, the business day prior to the August 31st ex-div date): +$0.00; or
(b) Dividend Income (If Goldman Sachs stock assigned at Sept 4th, 2020 expiration): +$125.00
= ($1.25 dividend per share x 100 shares)

(c) Capital Appreciation (If Goldman Sachs Call option assigned early on Aug 28th): -$386.00
+($197.50 - $201.36) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $197.50 strike price at options expiration): -$386.00
+($197.50 - $201.36) * 100 shares

1. Total Net Profit [If option exercised on Aug 28th (business day prior to Aug 31st ex-dividend date)]: +$282.00

= (+$668.00 options income +$0.00 dividend income -$386.00 capital appreciation); or

2. Total Net Profit (If Goldman Sachs shares assigned at $197.50 strike price at Sept 4th, 2020 expiration): +$407.00

= (+$668.00 +$125.00 -$386.00)

1. Absolute Return (If option exercised early on August 28th): +1.4%

= +$282.00/$19,468.67

Annualized Return (If option exercised early): +40.7%

= (+$282.00/$19,468.67)*(365/13 days); or

2. Absolute Return (If Goldman Sachs shares assigned at $197.50 at September 4th, 2020 options expiration): +2.1%

= +$407.00/$19,468.67

Annualized Return (If Goldman Sachs shares assigned at $48.00 at Aug 7th, 2020 expiration): +42.4%

= (+$407.00/$19,468.67)*(365/18 days)

Either outcome provides an attractive return-on-investment result for this Goldman Sachs investment.  These returns will be achieved as long as the stock is above the $197.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $193.43 ($201.36 -$6.68 -$1.25) provides 3.9% downside breakeven price protection below today's stock purchase price.

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 Goldman Sachs position, only seven criteria were met, but because both of the annualized returns shown in criteria #8 below are above the desired threshold of +30.0%, this Covered Calls buy/write transaction was executed.

Pop Quiz #3

Pop Quiz #1 had a narrative list question and Pop Quiz #2 had six multiple choice questions.
So, to continue with a variety of quiz types, Pop Quiz #3 below has ten fill-in-the-blank questions.

I will post my answers to each of these on Wednesday this week.

In the mean time, please email me at partlow@cox.net with your answers and I will send you a reply with the correct answers.

1. Another name for Covered Calls is ___________________.

2. Each Call option represents how many shares? _______

3. The Call owner has the right to buy. The Call seller has the ____________ to sell.

4. When the Call owner exercises their Call option, the Call seller must ___________________.

5. You established a Covered Call by buying 100 share of XYZ at $102 and sold a $100 Call option at $4 premium. The net profit if assigned at expiration (excluding commissions) is $_______.

6. If you make a $200 net profit on a $10,000 investment in exactly one month, your annualized return-on-investment is ______%.

7. The closer to the options expiration date we get, the rate of an option's time value decay (increases, decreases, or stays the same)?

8. To roll out a current Covered Calls position to a future Covered Calls in the same stock, a single ____________ transaction is made.

9. An out-of-the-money Call option has only __________ value.

10. Before entering a Covered Calls position on stock XYZ, the best way to compare potential financial results in positions with differing expiration dates is by calculating their ____________________________.

Best Wishes,
Jeff

Established Covered Calls Position in Phillips 66 Using the Dividend Capture Strategy

Today a Covered Calls position was established in Phillips 66 (ticker symbol PSX) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $64.39 and 2 August 21st, 2020 Call options were sold at $2.47 at the $62.50 strike price.   Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, a moderately in-the-money Covered Calls position was established -- the Delta was 69.6, which closely approximates the probability that the Call options will be in-the-money on the options expiration date.  There is an upcoming ex-dividend of $.90 per share next Monday (August 17th) which provides an annual dividend yield of 5.6% at the current stock price of $64.39.  Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the August 21st options expiration date.  Earnings for the 2nd quarter were announced two weeks ago, so there is no intervening earnings report prior to the options expiration date.

An interesting aspect whenever there is a Monday ex-dividend date is that it could be beneficial for us Call sellers.  The Call owners must make their exercise decision by the business day prior to the ex-dividend date which in this instance is in only three days (this Friday, August 14th).  So although there are 5 calendar days until Monday's ex-dividend date, there are only three trading days (including today) for Call owners to make their options exercise decision.   

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

•  +0.9% absolute return (equivalent to +68.4% annualized return-on-investment for the next 5 days) if the stock is assigned early (this Friday which is the last business day prior to the August 17th ex-dividend date); OR 

• +2.4% absolute return (equivalent to +87.2% annualized return over the next 10 days) if the stock is assigned on the August 21st options expiration date.

Phillips 66 (PSX) -- New Covered Calls Position

The buy/write transaction was:
08/12/2020 Bought 300 Phillips 66 shares @ $64.39
08/12/2020 Sold 3 Phillips 66 8/21/2020 $62.50 Call options @ $2.47
Note: the Time Value (aka Extrinsic Value) in the Call options was $.58 per share = [$2.47 Call options premium - ($64.39 stock price - $62.50 strike price)]
08/17/2020 Upcoming quarterly ex-dividend of $.90 per share

Two possible overall performance results (including commissions) for this Phillips 66 Covered Calls position are as follows:
Covered Calls Cost Basis: $18,578.01
= ($64.39 - $2.47) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$741.00
= ($2.47 * 300 shares)
(b) Dividend Income (If option exercised early on Aug 14th, the business day prior to the Aug 17th ex-div date): +$0.00; or
(b) Dividend Income (If PSX stock assigned at August 21st, 2020 expiration): +$270.00
= ($.90 dividend per share x 300 shares)

(c) Capital Appreciation (If PSX Call options assigned early on Aug 14th): -$567.00
+($62.50 - $64.39) * 300 shares; or
(c) Capital Appreciation (If PSX shares assigned at $62.50 strike price at options expiration): -$567.00
+($62.50 - $64.39) * 300 shares

1. Total Net Profit [If option exercised on Aug 14th (business day prior to Aug 17th ex-dividend date)]: +$174.00

= (+$741.00 options income +$0.00 dividend income -$567.00 capital appreciation); or

2. Total Net Profit (If Phillips 66 shares assigned at $62.50 strike price at August 21st, 2020 expiration): +$444.00

= (+$741.00 +$270.00 -$567.00)

1. Absolute Return (If three Phillips 66 Call options exercised early on Aug 14th): +0.9%

= +$174.00/$18,578.01

Annualized Return (If option exercised early): +68.4%

= (+$174.00/$18,578.01)*(365/5 days); or

2. Absolute Return (If Phillips 66 shares assigned at $62.50 at Aug 21st, 2020 options expiration): +2.4%

= +$444.00/$18,578.01

Annualized Return (If PSX shares assigned at $62.50 at Aug 21st, 2020 expiration): +87.2%

= (+$444.00/$18,578.01)*(365/10 days)

Investing in anything in the Energy sector is risky now, but I decided that the high potential returns justified this investment -- in other words, high risk, but high potential reward.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $61.02 ($64.39 -$2.47 -$.90) provides 5.2% downside protection below today's stock purchase price.

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 Phillips 66 position, only seven of the nine criteria were met, but because both of the annualized returns shown in criteria #8 below are outstanding, this Covered Calls buy/write transaction was executed.

Established Covered Calls in Micron Technology Inc.

This afternoon, a new short-term (10 calendar days) Covered Calls position was established in Micron Technology Inc. (ticker MU) with an August 21st, 2020 options expiration date. A prior two-week position in Micron expired in-the-money at the August 7th expiration so the 500 shares of Micron were sold at the $48.00 strike price (see details here).  For this new Covered Calls position, five Calls were sold at $1.96 at the $47.00 strike price when the stock price was $48.34. 

Micron's 2nd quarter earnings report was 4 weeks ago.  Despite the excellent results, Micron's stock price remains virtually unchanged.  Their future is bright since they are strong in key growth areas of SSDs, Cloud, Smartphones, Graphics/Game, and 5G with their mix of 2/3 DRAM and 1/3 NAND chips.  Their 3-year CEO, Sanjay Mehrotra, is a brilliant chips engineer who has over 70 patents and co-founded SanDisk.  On the earnings conference call, he was confident and visionary in describing Micron's future diversification projects and the company's focus on developing "higher margin" products.  The semiconductor industry is constantly changing and highly competitive.  Micron's commitment to a Research and Development-to-Revenue ratio of 13% will help them achieve their goals of developing new, cutting edge semiconductor chips.  

Also, Micron's finances are strong and they are also very highly rated by analysts.  Reuters indicates that currently 25 analysts have a Buy or Outperform rating, 10 have a Hold, and 1 has a Strong Sell, and their average target price is $65 (34% above the current price).  

As detailed below, the potential return-on-investment result is +1.3% absolute return in 10 days (equivalent to a +48.8% annualized return-on-investment).  

Micron Technology Inc. (MU) -- New Covered Calls Position

The Buy/Write transaction was as follows:
08/12/2020 Bought 500 shares of Micron Technology Inc. stock @ $48.34 per share 
08/12/2020 Sold 5 Micron Aug 21st, 2020 $47.00 Call options @ $1.96 per share

A possible overall performance results (including commissions) if the stock price is above the $47.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $23,193.35
= ($48.34 - $1.96) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$980.00
= ($1.96 * 500 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Micron stock is above $47.00 strike price at August 21st expiration): -$670.00
= ($47.00 - $48.34) * 500 shares

Total Net Profit: +$310.00
= (+$980.00 options income +$0.00 dividend income -$670.00 capital appreciation)

Absolute Return: +1.3%
= +$310.00/$23,193.35
Equivalent Annualized Return: +48.8%
= (+$310.00/$23,193.35)*(365/10 days)

The downside 'breakeven price' at expiration is at $46.38 ($48.34 - $1.96), which is 4.1% below the current market price of $48.34.

New Cash-Secured Puts Position Established in VMware Inc.

A new position was established in VMware Inc. (ticker VMW) by selling two August 21st, 2020 100% Cash-Secured Put options at the $137.00 strike price at $1.70 when the price of VMware stock was at $141.88 per share (3.6% above the strike price).  This is a moderately in-the-money position since the probability of assignment on the options expiration date was 71.8% when this position was established. 

The 35.9 Implied Volatility for these VMware Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 21.4.   So the $338.66 ($1.70 per share x 200 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options.  Importantly, there is no earnings report prior to the August 21st expiration date.

In a prior post (here), the Covered Calls Advisor explained the Company Checklist form used to summarize the research done prior to establishing a position in any particular company.  So as an example of the type of information I consider, here is the Checklist completed two days ago for VMware:

As detailed below, for this new VMware Cash-Secured Puts position there is potential for a +1.3% absolute return in 11 days (equivalent to a +41.5% annualized return-on-investment).  



VMware Inc. (VMW) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
08/11/2020  Sold 2 VMware August 21st, 2020 $137.00 100% Cash-Secured Put options @ $1.70 per share.

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

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $27,061.34
= ($137.00 - $1.70) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$338.66
= ($1.70 *200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VMW is above $137.00 strike price at the August 21st expiration): +$0.00
= ($137.00 - $137.00) *200 shares

Total Net Profit (If VMware stock price is above $137.00 strike price at options expiration): +$338.66
= (+$338.66 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If VMW stock price is above $137.00 strike price at the Aug 21st options expiration) : +1.3%
= +$338.66/$27,061.34
Annualized Return: +41.5%
= (+$338.66/$27,061.34)*(365/11 days)

The downside 'breakeven price' at expiration is at $135.30 ($137.00 - $1.70), which is 4.6% below the current market price of $141.88.

Answers to Pop Quiz #2

To my fellow Covered Calls investors,
Below are my answers and explanations regarding the six questions in Pop Quiz #2: Link to Post with Pop Quiz #2 Questions

Question #1. Covered Calls are best described as:
A. A stock investing strategy
B. An options strategy
C. A stock hedging strategy
D. A spread strategy
E. None of the Above

The correct answer is C:  Covered Calls are best described as a stock hedging strategy.

Only 4 of 27 responses answered correctly.
The most popular answer (17 of 27 responses) was: Covered Calls are best described as an options strategy.

I have been investing via Covered Calls since the late 1970s, but it wasn’t until I read “Option Volatility and Pricing” by Sheldon Natenberg in the mid-1990s that it became clear to me that Covered Calls positions are essentially a stock hedging strategy.  Naternberg's book is one of the most widely read books among active option traders around the world.  His discussion of Covered Calls is contained in the chapter titled “Hedging with Options”.  I have always, and still to this day, consider myself to be a “Covered Calls investor”, but Natenberg refers to us as “hedgers”.  

A definition of hedging is when you take a position to protect against losses in some other position.  So, we take a position (think of us selling Call options on stock XYZ) to protect against losses in another position (think us owning shares of stock XYZ).    I consider the best book written primarily about Covered Calls investing is “New Insights on Covered Call Writing” by Lehman and McMillan (if you don't already have it in your personal library you can get it here).  In Chapter 4: "Turning a Position into a Strategy”, there is a section titled “Hedging Individual Stocks”.  The first sentence says: “When you write a call against a stock position, you are reducing the downside risk of the stock position by the amount of premium you take in.”   Therefore, establishing a Covered Calls position essentially enables us to reduce our initial cost basis in buying the stock by the amount of the Call options premium we receive from selling those options.

Now, regarding the most popular answer (17 of 26 responses) that Covered Calls are best described as an options strategy.

Yes, Call options are one of the two components of a Covered Calls position.  However, the position includes both stocks and options and the Call options are used primarily to provide some downside protection (a “hedge”) to our long stock position; that is, some profit protection even if a small decline in the stock purchase price occurs.  So, considering the role of both components of Covered Calls positions together, the most complete answer is that “Covered Calls are best described as  a stock hedging strategy”.  

Question #2. Covered Calls return-on-investment results are:
A. Better than a stocks buy-and-hold portfolio
B. Worse than a stocks buy-and-hold portfolio
C. About the same as a stocks buy-and-hold portfolio
D. None of the Above

I decided that a reasonable case could be made for all of these answers, so I considered all of your answers correct on this one.  There was at least one person that chose each of the four possible answers, but I was very pleased to see that 22 of you chose A.

The introduction to my Covered Calls Advisor blog states: “The goal of this blog is to share information helpful to all who are interested in Covered Calls. It will demonstrate that by following an informed and disciplined process, Covered Calls investing achieves market-beating returns.”   So although my own experience affirms my belief that Covered Calls do achieve market-beating returns, it is also heartening to see that so many of you agree.  However, answer D is also appealing to me because I know that market-beating returns are not guaranteed.  There are Covered Calls investors that experience answer C and unfortunately also answer B (for a variety of reasons, but most frequently because of poor stock selection).

Question #3. Covered Calls are _____________ than buying-and-holding stocks.
A. more risky
B. less risky
C. about the same risk
D. None of the Above

The correct answer is B:  Covered Calls are less risky than buying-and-holding stocks.

20 of the 27 responses answered correctly.

Several academic studies have concluded that Covered Calls portfolios are, on average, about 30% less risky than comparable buy-and-hold stocks portfolios.  These studies are very technical and are often authored by experts in advanced mathematics and statistics.  I have been unsuccessful in understanding all aspects of these papers, but my common sense informs me that their results are reasonable.

Question #4. The largest time value in a Call option occurs:
A. at-the-money
B. in-the-money
C. out-of-the money
D. None of the Above

The correct answer is A: The largest time value in a Call option occurs at-the-money.

There were 16 correct answers to this question. 

I thought a good way to show the answer would be to show a real-time example.
The green circles on the SPY options chain screen below show that the largest time value (also known as the extrinsic value) for both Calls and Puts occurs at the nearest-to-the-money strike price (in this case at the $337.00 strike price when SPY was trading at $337.04).

Extra Credit Question to think about: Given the options principle of Put/Call Parity, why do you think the time value in this example of $8.15 for the Puts is greater than the $7.54 for the Calls?

Question #5. The most likely time for a Covered Calls position to be assigned early is:
A. Anytime the option is in-the-money
B. When the stock increases from the purchase price
C. The day before the options expiration date
D. The day before the stock ex-dividend date
E. None of the above

The correct answer is D: The most likely time for a Covered Calls position to be assigned early is the day before the stock ex-dividend date.

There were 16 correct answers to this question.

An excellent explanation of why this is true is provided in a 2012 article in the Born-to-Sell blog:
Read at link here.

Question #6. When Cash-Secured Puts are transacted at the same time, at the same strike price, at the same expiration date, and for the same stock as Covered Calls, they are:
A. The same as Naked Covered Calls
B. The opposite of Covered Calls
C. Almost Equivalent to Covered Calls
D. More Risky than Covered Calls
E. More Conservative than Covered Calls
F. None of the Above

The correct answer is C:  When Cash-Secured Puts are transacted at the same time, at the same strike price, at the same expiration date, and for the same stock as Covered Calls, they are almost equivalent to Covered Calls.

There were 12 correct answers to this question.

This is an important concept to understand, so please commit the time necessary to carefully read (and re-read if necessary) these two blog articles. Each article addresses the close equivalence of Covered Calls and Cash-Secured Puts:

https://optionparty.com/cash-secured-puts-vs-covered-calls/

https://coveredcallsadvisor.blogspot.com/2009/05/covered-calls-versus-cash-secured-puts.html

Bonus Question -- Take a Guess: What percentage of respondents will get all six questions correct?

The answer is 0%


I hope your knowledge (and curiosity to continue learning) about Covered Calls investing is increasing from these Pop Quizzes.  I am pleased that 27 people responded to this 2nd quiz.  This response encourages me to consider the possibility of creating Quiz #3 before the end of this month.
Hint: There will be at least 2 questions developed from the information written above in the answers to these six questions included in Pop Quiz #3.

Best Wishes and Godspeed,
Jeff