This morning, a Covered Calls debit limit order of $70.37 was entered for a position in Rio Tinto PLC (ticker RIO) at the $71.57 strike price and April 16th, 2021 options expiration date. At 3:22pm this afternoon, the stock had declined by 2.4% today from yesterday's closing price and the limit order was executed -- purchased 200 RIO shares at $74.23 and sold 2 April 16th, 2021 $71.57 Calls for $3.86 per share. Often, the Covered Calls Advisor will enter a Covered Calls position at a net debit limit price that provides a return-on-investment potential that equals or exceeds the desired minimum threshold for the investment. Currently, the minimum potential Annualized ROI for a position of between 20 and 29 days duration (this RIO position is now 25 days until the expiration date) is 20.0%. As shown in the calculations below, this position will achieve +24.9% annualized roi if it closes in-the-money on the options expiration date.
The time value received when this RIO Covered Calls position was established was $1.20 per share = [$3.86 Call options price - ($74.23 stock price - $71.57 strike price)]. The odd $71.57 strike price was modified from the original $72.50 strike price to adjust for RIO's $.93 special dividend of March 4th, 2021. The Delta was 65.9 which approximates a probability of 65.9% that the Call options will be in-the-money and therefore the stock assigned (i.e. sold) on the options expiration date. The Implied Volatility of these Call options was 32.0 today when this transaction was executed.
RIO Tinto was identified during the Covered Calls Advisor's analysis this weekend from a review of stocks passing my 'Quantitative Value' screener. This screener is based on the model presented in "Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors" (see link). The primary metric used is the EV/EBIT value factor, then screening further for high quality companies (based on ROA-related metrics) while also eliminating those companies with weak quality of earnings. Rio Tinto was one of only five companies in the Materials sector that passed this screener.
As detailed below, the potential return-on-investment result is +1.7% absolute
return in 25 days (equivalent to a +24.9% annualized
return-on-investment).
Rio Tinto PLC (RIO) -- New Covered Calls Position
03/23/2021 Bought 200 Rio Tinto shares @ $74.23 per share
03/23/2021 Sold 2 Rio Tinto April 16th, 2021 $71.57 Call options @ $3.86 per share
A possible overall performance result (including commissions) if the stock price is above the $71.57 strike price at expiration would be as follows:
Covered Call Cost Basis: $14,075.34
= ($74.23 - $3.86) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$772.00
= ($3.86 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Rio Tinto stock is above $71.57 strike price at the April 16th, 2021 options expiration): -$532.00
= ($71.57 - $74.23) * 200 shares
Total Net Profit: +$240.00
= (+$772.00 options income +$0.00 dividend income -$532.00 capital appreciation)
Absolute Return: +1.7%
= +$240.00/$14,075.34
Equivalent Annualized Return: +24.9%
= (+$240.00/$14,075.34)*(365/25 days)
The downside 'breakeven price' at expiration is at $70.37 ($74.23 - $3.86), which is 5.2% below today's purchase price of $74.23.
