As detailed below, the return-on-investment results are as follows:
- Diamondback Energy Inc. -- +1.8% absolute return in 20 days (equivalent to a +33.3% annualized return-on-investment); and
- Goodyear Tire & Rubber Co. -- +2.3% absolute
return in 13 days (equivalent to a +63.9% annualized
return-on-investment).
Although these annualized return-on-investment results are less than what would have been achieved if these positions had closed in-the-money at last Friday's options expiration, these results still provide a good example of the advantage that can accrue from selling in-the-money Covered Calls. Despite the stocks declining to below their strike prices, a net profit was still achieved for both positions from a combination of the: (a) dividend income received; and (b) time value decay in the Call options.
1. Diamondback Energy Inc. (FANG) -- Covered Calls Position Closed
The transactions were as follows:
11/02/2021 Bought 200 shares of Diamondback stock @ $109.20 per share
11/02/2021 Sold 2 Diamondback Nov. 19th, 2021 $105.00 Call options @ $6.90 per share
Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of the Call options was 36.2.
11/09/2021 Upcoming ex-dividend of $.50 per share
11/19/2021 2 FANG Call options expired out-of-the-money, so 200 FANG stock shares remain in the Covered Calls Advisor Portfolio.
11/22/2021 Sold 200 FANG shares at $103.67 to close out this position.
The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $20,461.34
= ($109.20 - $6.90) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,378.66
= ($6.90 * 200 shares) - $1.34 commission
(b) Dividend Income: $100.00
= $.50 dividend per share x 200 shares
(c) Capital Appreciation (FANG stock sold at $103.6735 per share): -$1,105.30
= ($103.6735 - $109.20) * 200 shares
Total Net Profit: +$373.36
= (+$1,378.66 options income +$100.00 dividend income -$1,105.30 capital appreciation)
Absolute Return (If stock assigned on May 21st options expiration date): +1.8%
= +$373.36/$20,461.34
Equivalent Annualized Return: +33.3%
= (+$373.36/$20,461.34)*(365/20 days)
2. Goodyear Tire & Rubber Co. (GT) -- Covered Calls Position Closed
The buy/write transaction was as follows:
11/09/2021 Bought 600 shares of Goodyear stock @ $23.03 per share
11/09/2021 Sold 6 Goodyear November 19th, 2021 $22.00 Call options @ $1.37 per share
Note: The Implied Volatility of the Call option was 42.4 when this transaction was executed which provides an excellent return-on-investment potential (as detailed below).
11/19/2021 6 Goodyear Call options expired out-of-the-money, so 600 GT stock shares remain in the Covered Calls Advisor Portfolio.
11/22/2021 Sold 600 Goodyear shares at $22.16 to close out this position.
A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $13,000.02
= ($23.03 - $1.37) * 600 shares + $4.02 commission
Net Profit Components:
(a) Option Income: +$817.98
= ($1.37 * 600 shares) - $4.02 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$522.00
= ($22.16 -$23.03) * 600 shares
Total Net Profit: +$295.98
= (+$817.98 Call options income +$0.00 dividend income -$522.00 capital appreciation)
Absolute Return-on-Investment: +2.3%
= +$295.98/$13,000.02
Equivalent Annualized Return-on-Investment: +63.9%
= (+$295.98/$13,000.02) * (365/13 days)
