GM's current price of $32.17 is near its low for the past 3 years and its recent decline from the $40 area for a good portion of the past year. But I am bullish on GM now given both: (1) its good valuation metrics (such as low price-to-sales, p/e ratio, and price-to-book values) in comparison to their prior 5-year averages; and (2) the fact that GM is estimated to make a dramatic EPS increase this quarter to $1.63 per share versus $1.14 in the same quarter last year--and they also have exceeded analysts' EPS estimates in each of their last three quarters.
GM has an upcoming quarterly ex-dividend on June 1st at $.09 per share, so two potential return-on-investment results for this position includes the possibility of early exercise since the ex-dividend date is prior to the June 9th options expiration date. Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, in-the-money Covered Calls were established.
As detailed below, two potential return-on-investment results for this GM position are:
General Motors Co. (GM) -- New Covered Calls Position
The $.09 ex-dividend of June 1st is included in the potential results detailed below. Although unlikely, if the current time value (i.e. extrinsic value) of $.40 [$2.07 option premium - ($32.17 stock price - $30.50 strike price)] remaining in the short Call options decay to about $.10 or less by May 31st (the last business day prior to the 6/1/2023 ex-div date), then it is possible that the five Call options would be exercised early by the owner of the Calls in order for them to capture the dividend and purchase the 500 GM shares at the $30.50 strike price.
The transactions were:
05/24/2023 Bought 500 GM shares @ $32.17
05/24/2023 Sold 5 GM June 9, 2023 $30.50 Call options @ $2.07 per share
Note: a simultaneous buy/write transaction was executed at a net debit limit order of $30.10 per share.
06/01/2023 Upcoming ex-dividend of $.09 per share
Two possible overall performance results (including commissions) for this General Motors Covered Calls position are as follows:
Covered Calls Position Net Investment: $16,088.35
= ($32.17 * 500 shares +$3.35 commission)
Net Profit:
(a) Options Income: +$1,031.65
= ($2.07 per share x 500 shares) - $3.35 commissions
(b) Dividend Income (If option exercised early on business day prior to June 1st ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at the June 9th, 2023 expiration): +$45.00
As detailed below, two potential return-on-investment results for this GM position are:
- If Early Assignment: +1.2% absolute return (equivalent to +55.8% annualized return for the next 8 days) if the stock is assigned early (business day prior to June 1st ex-date); OR
- If Dividend Capture: +1.5% absolute return (equivalent to +32.2% annualized return over the next 17 days) if the stock is assigned at the June 9th, 2023 expiration date.
General Motors Co. (GM) -- New Covered Calls Position
The transactions were:
05/24/2023 Bought 500 GM shares @ $32.17
05/24/2023 Sold 5 GM June 9, 2023 $30.50 Call options @ $2.07 per share
Note: a simultaneous buy/write transaction was executed at a net debit limit order of $30.10 per share.
06/01/2023 Upcoming ex-dividend of $.09 per share
Two possible overall performance results (including commissions) for this General Motors Covered Calls position are as follows:
Covered Calls Position Net Investment: $16,088.35
= ($32.17 * 500 shares +$3.35 commission)
Net Profit:
(a) Options Income: +$1,031.65
= ($2.07 per share x 500 shares) - $3.35 commissions
(b) Dividend Income (If option exercised early on business day prior to June 1st ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at the June 9th, 2023 expiration): +$45.00
= $.09 per share x 500 shares.
2. Total Net Profit (If GM assigned at $30.50 at the June 9th, 2023 expiration date): +$241.65
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the June 9th, 2023 options expiration) for this GM position is 74.6%. This compares with a probability of profit of 50.2% for a buy-and-hold of this GM stock over the same time period. Using this probability of profit of 74.6%, the approximate expected value annualized return-on-investment (if held until expiration) is +24.1% (+32.2% maximum potential annualized return on investment * 74.6%), an attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $34.15 ($32.17 - $.09 + $2.07). This is the price above which it would have been more profitable to simply buy-and-hold GM stock until the June 9th, 2023 options expiration date rather than establishing this GM Covered Calls position.
(c) Capital Appreciation (If GM assigned early on June 1st): -$835.00
+($30.50 - $32.17) * 500 shares; or
(c) Capital Appreciation (If GM assigned at $30.50 at the June 9th, 2023 options expiration): -$835.00
+($30.50 - $32.17) * 500 shares
+($30.50 - $32.17) * 500 shares; or
(c) Capital Appreciation (If GM assigned at $30.50 at the June 9th, 2023 options expiration): -$835.00
+($30.50 - $32.17) * 500 shares
1. Total Net Profit (If option exercised on day prior to June 1st ex-dividend date): +$196.65
= (+$1,031.65 options income +$0.00 dividend income -$835.00 capital appreciation); or
2. Total Net Profit (If GM assigned at $30.50 at the June 9th, 2023 expiration date): +$241.65
= (+$1,031.65 options income +$45.00 dividend income - $835.00 capital appreciation)
1. Absolute Return [If option exercised on May 31st (business day prior to ex-dividend date)]: +1.2%
= +$196.65/$16,088.35
Annualized Return (If option exercised early): +55.8%
= (+$196.65/$16,088.35) * (365/8 days); or
2. Absolute Return (If GM assigned at $30.50 at its June 9th, 2023 expiration): +1.5%
= +$241.65/$16,088.35
= +$241.65/$16,088.35
Annualized Return: +32.2%
= (+$241.65/$16,088.35) * (365/17 days)
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the June 9th, 2023 options expiration) for this GM position is 74.6%. This compares with a probability of profit of 50.2% for a buy-and-hold of this GM stock over the same time period. Using this probability of profit of 74.6%, the approximate expected value annualized return-on-investment (if held until expiration) is +24.1% (+32.2% maximum potential annualized return on investment * 74.6%), an attractive risk/reward profile for this relatively conservative investment.
The 'crossover price' at expiration is $34.15 ($32.17 - $.09 + $2.07). This is the price above which it would have been more profitable to simply buy-and-hold GM stock until the June 9th, 2023 options expiration date rather than establishing this GM Covered Calls position.
As always I welcome your email questions at partlow@cox.net.
Best Wishes and Godspeed,
Jeff Partlow
partlow@cox.net
