Today, two new positions were established in Transocean Inc. (Ticker Symbol RIG). Both positions were established at the $48.00 strike price. Today's 2nd quarter earnings release was in-line for both revenue and earnings. These investments are made primarily because Transocean has an attractive valuation, but today's quarterly report also revealed this trifecta of encouraging guidance:- Increasing demand for its services as demonstrated by a 19% increase in its year-over-year backlog.
- Prices Increasing. As also signaled in earlier earnings reports by RIG's competitors (Ensco and Noble Corp), recent contract extensions for its rigs have been signed at significant increases compared with current pricing.
- Strong internal cost controls. The new CEO is committed to improved operating margins, and implementation of his expense control process has begun.
1. Transocean Inc. -- 100% Cash-Secured Puts for August Expiration
The transaction is as follows:
8/08/2013 Sold 2 Aug2013 $48.00 Puts @ $.78
Note: The price of RIG was $47.79 when this transaction was executed.
A possible overall performance result (including commissions) for this RIG transaction would be as follows:
100% Cash-Secured Cost Basis: $9,600.00
= $48.00*200
Net Profit:
(a) Options Income: +$145.55
= ($.78*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RIG closes above $48.00 at Aug2013 expiration): +$0.00
= ($48.00-$48.00)*200 shares
Total Net Profit (If RIG is above $48.00 strike price at Aug2013 options expiration): +$145.55
= (+$145.55 +$0.00 +$0.00)
Absolute Return (If RIG is above $48.00 at Aug2013 options expiration and Put options thus expire worthless): +1.5%
= +$145.55/$9,600.00
Annualized Return (If RIG above $48.00 at expiration): +55.3%
= (+$145.55/$9,600.00)*(365/10 days)
The downside 'breakeven price' at expiration is at $47.22 ($48.00 - $.78). This is the price at which this 100% cash-secured Puts investment would make neither a profit or a loss.
The 'crossover price' at expiration is $48.57 ($47.79 + $.78). This is the price above which it would have been more profitable to simply buy-and-hold RIG stock until Aug 16th (the Aug2013 options expiration date) rather than holding the short Put options.
2. Transocean Inc -- Covered Calls for September expiration
08/08/2013 Bought 200 RIG shares @ $48.76
08/08/2013 Sold 2 RIG Sep2013 $48.00 Call Options @ $1.65The transaction is as follows:
8/08/2013 Sold 2 Aug2013 $48.00 Puts @ $.78
Note: The price of RIG was $47.79 when this transaction was executed.
A possible overall performance result (including commissions) for this RIG transaction would be as follows:
100% Cash-Secured Cost Basis: $9,600.00
= $48.00*200
Net Profit:
(a) Options Income: +$145.55
= ($.78*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RIG closes above $48.00 at Aug2013 expiration): +$0.00
= ($48.00-$48.00)*200 shares
Total Net Profit (If RIG is above $48.00 strike price at Aug2013 options expiration): +$145.55
= (+$145.55 +$0.00 +$0.00)
Absolute Return (If RIG is above $48.00 at Aug2013 options expiration and Put options thus expire worthless): +1.5%
= +$145.55/$9,600.00
Annualized Return (If RIG above $48.00 at expiration): +55.3%
= (+$145.55/$9,600.00)*(365/10 days)
The downside 'breakeven price' at expiration is at $47.22 ($48.00 - $.78). This is the price at which this 100% cash-secured Puts investment would make neither a profit or a loss.
The 'crossover price' at expiration is $48.57 ($47.79 + $.78). This is the price above which it would have been more profitable to simply buy-and-hold RIG stock until Aug 16th (the Aug2013 options expiration date) rather than holding the short Put options.
2. Transocean Inc -- Covered Calls for September expiration
08/08/2013 Bought 200 RIG shares @ $48.76
08/21/2013 Ex-dividend of $.56 per share
This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $.56 with an ex-dividend date in 13 days (Aug 21st). If the current time value (i.e. extrinsic value) of $.89 = [$1.65 option premium - ($48.76 stock price - $48.00 strike price)] remaining in the short call option decays to less than the $.56 ex-dividend amount in 12 more days [i.e. Aug 20th (the business day prior to the ex-div date)], then there is a possibility that the call options owner will exercise early and will call the stock away to capture the dividend.
As shown below, two potential returns for this position are:
As shown below, two potential returns for this position are:
If Early Assignment: +1.6% absolute return (equivalent to +45.6% annualized return) if the stock is assigned early (day prior to Aug 21st ex-div date); OR
If Dividend Capture: +2.8% absolute return (equivalent to +22.5% annualized return) if the stock is assigned at Sep 2013 expiration on September 20th As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very good return. These returns will be achieved as long as the stock stays above the $48.00 strike price at assignment (1.6% of downside protection). Alternatively, if the stock declines below the strike price, the breakeven price of $47.11 ($48.76-$1.65) provides 3.4% downside breakeven protection from the original $48.76 purchase price.
In summary, this covered calls investment provides the potential for nice absolute and annualized ROIs for a six week covered calls trade.
The Covered Calls Advisor has established a set of criteria to identify situations that are advantageous for establishing covered calls positions that might achieve good returns from either an early assignment or from assignment at options expiration. There are a very limited number of these "Early Assignment or Dividend Capture" covered call opportunites that meet the criteria below, but if/when we find them we should take full advantage.
As shown below, this Transocean position satisfies ALL of these criteria:
Stock Purchase Cost: $9,760.95
= ($48.76*200+$8.95 commission)
Net Profit:
(a) Options Income: +$319.55
= ($1.65*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Aug 21st ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Sep2013 expiration): +$112.00
= ($.56 dividend per share x 200 shares);
(c) Capital Appreciation (If stock assigned early on Aug 20th): -$160.95
+($48.00-$48.76)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $48.00 at Sep2013 expiration): -$160.95
+($48.00-$48.76)*200 - $8.95 commissions
+($48.00-$48.76)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $48.00 at Sep2013 expiration): -$160.95
+($48.00-$48.76)*200 - $8.95 commissions
Total Net Profit (If option exercised on day prior to Aug 21st ex-div date): +$158.60
= (+$319.55 +$0.00 -$160.95); or
Total Net Profit (If stock assigned at $48.00 at Sep2013 expiration): +$270.60
= (+$319.55 +$0.00 -$160.95); or
Total Net Profit (If stock assigned at $48.00 at Sep2013 expiration): +$270.60
= (+$319.55 +$112.00 -$160.95)
1. Absolute Return (If option exercised on day prior to Aug 21st ex-div date): +1.6%
= +$158.60/$9,760.95
Annualized Return (If option exercised early): +45.6%
= (+$158.60/$9,760.95)*(365/13 days); OR
2. Absolute Return (If stock assigned at $48.00 at Sep2013 expiration): +2.8%
= +$270.60/$9,760.95
Annualized Return (If stock assigned): +22.5%
= +$158.60/$9,760.95
Annualized Return (If option exercised early): +45.6%
= (+$158.60/$9,760.95)*(365/13 days); OR
2. Absolute Return (If stock assigned at $48.00 at Sep2013 expiration): +2.8%
= +$270.60/$9,760.95
Annualized Return (If stock assigned): +22.5%
= (+$270.60/$9,760.95)*(365/45 days);
