A Covered Calls position was established this morning in the Energy Select Sector SPDR Fund ETF (ticker XLE), with a January 15th, 2021 options expiration date. Three hundred shares of the Energy Select Sector SPDR Fund were purchased at $40.01 and three Call options were sold at $2.67 per share at the $38.00 strike price.
The time value was $.66 per share [$38.00 strike price - ($40.01 share price - $2.67 options premium)] when this buy/write limit order transaction was executed. The Covered Calls Advisor has found that it is normally the case when there is an intervening ex-dividend (or ex-distribution in this ETF case) prior to the options expiration date, the time value available from establishing a Covered Calls position is greater than that which would be achieved by instead selling the identical position via Cash-Secured Puts. In this particular case, the $1.1801 ($.66 time value + $.5201 ex-distribution amount) potential from this Covered Calls position slightly exceeded the $1.15 available from the comparable Put options at the time this transaction occurred.
A potential return-on-investment result if this position closes in-the-money at the January 15th options expiration date is +3.2% absolute
return in 30 days (equivalent to a +38.4% annualized
return-on-investment). The delta was 69.0 when this position was established, which is the approximate probability that it will close in-the-money on the options expiration date in which case, as detailed below, the maximum potential profit would be achieved.
The buy/write transaction was as follows:
12/17/2020 Bought 300 shares of the Energy Select Sector SPDR Fund @ $40.01 per share
12/17/2020 Sold 3 XLE Jan 15th, 2021 $38.00 Call options @ $2.67 per share
Note: the Implied Volatility of these Call options was 35.2 when this position was established.
12/18/2020 Ex-distribution estimated at $.5201 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $11,204.01
= ($40.01 - $2.67) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$801.00
= ($2.67 * 300 shares)
(b) Quarterly Distribution Income: +$156.03
= $.5201 per share x 300 shares
(c) Capital Appreciation (If XLE is above $38.00 strike price at the January 15th, 2021 options expiration date): -$603.00
= ($38.00 -$40.01) * 300 shares
Total Net Profit: +$354.03
= (+$801.00 options income +$156.03 distribution income -$603.00 capital appreciation)
Absolute Return: +3.2%
= +$354.03/$11,204.01
Equivalent Annualized Return: +38.4%
= (+$354.03/$11,204.01)*(365/30 days)
These returns will be achieved if the Energy Select Sector SPDR Fund is above the $38.00 strike price at the market closing on the January 15th, 2021 options expiration date. If the stock declines below the strike price, the breakeven price of $36.8199 ($40.01 -$2.67 -$.5201) provides 8.0% downside breakeven protection below today's XLE purchase price.
Please email me at partlow@cox.net if you have any comments or questions related to this post or anything related to Covered Calls investing.
Jeff Partlow
