Covered Calls Position Established in General Motors Co.

Today, a new covered calls position was established in General Motors Co. (ticker symbol GM) with a Sept2015 expiration.  The General Motors stock was purchased at $30.93 and the Sep2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $30.00 strike price for $1.45 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (likely on Sept 7th) prior to the September 18th options expiration date.  Details of this position is provided below.

1. General Motors Co (GM)

A $.36 quarterly dividend goes ex-dividend around September 7th (note: on Sept 2nd, GM declared a $.36 quarterly dividend with an ex-div date of Sept 10th).  Although unlikely, if the current time value (i.e. extrinsic value) of $.52 [$1.45 option premium - ($30.93 stock price - $30.00 strike price)] remaining in the short call options decay substantially below the $.36 dividend amount by September 6th (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +1.5% absolute return (equivalent to +19.1% annualized return for the next 28 days) if the stock is assigned early (the day prior to Sept 7th ex-div date); OR

If Dividend Capture:  +2.6% absolute return (equivalent to +24.6% annualized return over the next 39 days) if the stock is assigned at Sep2015 expiration on Sept 18th.

08/11/2015 Bought 300 GM shares @ $30.93
08/11/2015 Sold 3 GM Sep2015 $30.00 Call options @ $1.45
09/10/2015 Upcoming ex-dividend of $.36 per share

Two possible overall performance results (including commissions) for this General Motors (GM) covered calls position are as follows:
Stock Purchase Cost: $9,287.95
= ($30.93*300+$8.95 commission)

Net Profit:
(a) Options Income: +$423.80
= ($1.45*300 shares) - $11.20 commissions
(b) Dividend Income (If option exercised early on day prior to Sept 7th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Sep2015 expiration): +$108.00
= ($.36 dividend per share x 300 shares)

(c) Capital Appreciation (If stock assigned early on Sept 6th): -$287.95
+($30.00-$30.930)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $30.00 at Sep2015 expiration): -$287.95
+($30.00-$30.93)*300 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Sept 7th ex-div date): +$135.85

= (+$423.80 +$0.00 -$287.95); or

Total Net Profit (If stock assigned at $30.00 at Sep2015 expiration): +$243.85

= (+$423.80 +$108.00 -$287.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.5%

= +$135.85/$9,287.95

Annualized Return (If option exercised early): +19.1%

= (+$135.85/$9,287.95)*(365/28 days); OR

2. Absolute Return (If stock assigned at $30.00 at Sep2015 expiration): +2.6%

= +$243.85/$9,287.95

Annualized Return (If stock assigned): +24.6%

= (+$243.85/$9,287.95)*(365/39 days)

Either outcome would provide a good return on investment.  These returns will be achieved as long as the stock is above the $30.00 strike price at expiration.

Established New Position in United Continental Holdings Inc.

Today, the Covered Calls Advisor established a new position in United Continental Holdings Inc.(ticker symbol UAL) by selling three Sep2015 Put options at the $55.00 strike price. This position is a somewhat conservative one since it was established with 3.2% downside protection to the strike price.

As detailed below, the United Continental investment will yield a +3.6% absolute return in 43 days (which is equivalent to a +30.6% annualized return-on-investment) if UAL closes above the $55.00 strike price on the Sep2015 options expiration date. 

This potential return is excellent given the 3.2% downside protection (from the current $56.84 stock price to the $55.00 strike price) when the position was established.  The implied volatility in the options was high at 37 when this position was established; so the $2.02 price per share received when the Puts were sold is very attractive to us option sellers, especially since the level of unknowns between now and the Sep2015 options expiration is relatively low, given that UAL has already announced their 2nd quarter earnings results.  With about 30% of airline companies' operating earnings coming from fuel expense, they will likely continue to achieve substantial earnings benefits (compared with last year) from oil prices that are substantially below their prior year pricing.  Their bookings are relatively stable and their pricing remains strong.  This situation does not appear to be fully appreciated in the price of airlines stocks, including United Continental.    

1.  United Continental Holdings Inc. (UAL) -- New Position
The transaction was as follows:
08/07/2015  Sold 3 UAL 100% cash-secured $55.00 Put options @ $2.02
Note: The price of UAL was $56.84 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that both of these positions were established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $16,500.00
= $55.00*300

Net Profit:
(a) Options Income: +$594.80
= ($2.02*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL is above $55.00 strike price at Sep2015 expiration): +$0.00
= ($55.00-$55.00)*300 shares

Total Net Profit (If UAL is above $55.00 strike price at Sep2015 options expiration): +$594.80
= (+$594.80 +$0.00 +$0.00)

Absolute Return (If UAL is above $55.00 strike price at Sep2015 options expiration): +3.6%
= +$594.80/$16,500.00
Annualized Return (If UAL is above $55.00 at expiration): +30.6%
= (+$594.80/$16,500.00)*(365/43 days)

The downside 'breakeven price' at expiration is at $52.98 ($55.00 - $2.02), which is 6.8% below the current market price of $56.84.
The 'crossover price' at expiration is $58.86 ($56.84 + $2.02).  This is the price above which it would have been more profitable to simply buy-and-hold UAL until Sept 18th (the Sep2015 options expiration date) rather than selling these Put options.

Covered Calls Position Established in International Paper

Today, a new covered calls position was established in International Paper (ticker symbol IP) with an Aug2015 expiration.  The International Paper stock was purchased at $47.30 and the Aug2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $46.00 strike price for $1.59 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Aug 12th) prior to the August 21st options expiration date.  Details of this position is provided below.

1. International Paper (IP)

A $.40 quarterly dividend goes ex-dividend on August 12th.  Although unlikely, if the current time value (i.e. extrinsic value) of $.29 [$1.59 option premium - ($47.30 stock price - $46.00 strike price)] remaining in the short call options decay substantially below the $.40 dividend amount by August 11th (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +0.4% absolute return (equivalent to +18.6% annualized return for the next 8 days) if the stock is assigned early (the day prior to Aug 12th ex-div date); OR

If Dividend Capture:  +1.3 absolute return (equivalent to +24.1% annualized return over the next 19 days) if the stock is assigned at Aug2015 expiration on August 21st.

08/03/2015 Bought 200 IP shares @ $47.30
08/03/2015 Sold 2 IP Aug2015 $46.00 Call options @ $1.59

08/12/2015 Upcoming ex-dividend of $.40 per share

Two possible overall performance results (including commissions) for this International Paper (IP) covered calls position are as follows:
Stock Purchase Cost: $9,468.95
= ($47.30*200+$8.95 commission)

Net Profit:
(a) Options Income: +$307.55
= ($1.59*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Aug 11th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Aug2015 expiration): +$80.00
= ($.40 dividend per share x 200 shares)

(c) Capital Appreciation (If stock assigned early on Aug 11th): -$268.95
+($46.00-$47.30)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $46.00 at Aug2015 expiration): -$268.95
+($46.00-$47.30)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Aug 12th ex-div date): +$38.60

= (+$307.55 +$0.00 -$268.95); or

Total Net Profit (If stock assigned at $46.00 at Aug2015 expiration): +$118.60

= (+$307.55 +$80.00 -$268.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +0.4%

= +$38.60/$9,468.95

Annualized Return (If option exercised early): +16.5%

= (+$38.60/$9,468.95)*(365/9 days); OR

2. Absolute Return (If stock assigned at $46.00 at Aug2015 expiration): +1.3%

= +$118.60/$9,468.95

Annualized Return (If stock assigned): +24.1%

= (+$118.60/$9,468.95)*(365/19 days)

Either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $46.00 strike price at assignment.

Established Short 100% Cash-Secured Puts Position in iShares China Large-Cap ETF

Today, the Covered Calls Advisor established a 100% cash-secured Puts position in iShares China Large-Cap ETF (Symbol FXI) by selling 7 Aug2015 Put options at the $39.00 strike price. This position indicates that the Covered Calls Advisor is willing to purchase FXI shares at $39.00 (for future covered calls investments) upon the market close on August 21st if the stock declines to below $39.00 at that time.  This is a somewhat conservative investment since FXI was at $39.90 (2.2% above the strike price) when this position was established.

As detailed below, this investment will achieve a +1.7% absolute return in 19 days (which is equivalent to a +33.5% annualized return) if FXI remains above $39.00 at the August 21st options expiration date.

This transaction and the associated potential return-on-investment result is detailed below.

1.  iShares China Large-Cap ETF (FXI) -- New Position
The transaction was as follows:
08/03/2015 Sold 7 iShares China Large-Cap ETF Aug2015 $39.00 Puts @ $.70
Note: The price of FXI was $39.90 when this transaction was executed.

Note: The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the seven Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $27,300.00
= $39.00*700
Note:  the price of FXI was $39.90 when the Put options were sold.

Net Profit:
(a) Options Income: +$475.80
= ($.70*700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI is above $39.00 strike price at Aug2015 expiration): +$0.00
= ($39.00-$39.00)*700 shares

Total Net Profit (If FXI is above $39.00 strike price upon the Aug2015 options expiration): +$475.80
= (+$475.80 +$0.00 +$0.00)

Absolute Return (If FXI is above $39.00 strike price at Aug2015 options expiration): +1.7%
= +$475.80/$27,300.00
Annualized Return: +33.5%
= (+$475.80/$27,300.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $38.30 ($39.00 - $.70), which is 4.1% below the current market price.
The 'crossover price' at expiration is $40.60 ($39.90 + $.70).  This is the price above which it would have been more profitable to simply buy-and-hold FXI shares until August 21st (the Aug2015 options expiration date) rather than holding these short Put options.