Established Covered Calls in MetLife Inc.

Today, a new covered calls position was established in MetLife Inc. (ticker symbol MET).  Three hundred shares of MET were purchased at $48.43 and three in-the-money Dec2015 Call options were simultaneously sold at the $47.50 strike price for $1.51 each.
As shown below, this investment will provide a +1.1% absolute return in 10 days (which is equivalent to a +39.1% annualized return) if MetlLife stock remains above the $47.50 strike price on the December 18th options expiration date.

This potential return-on-investment result is attractive to us option sellers given this conservative investment -- there is 1.9% downside protection (from the current $48.43 stock price to the $47.50 strike price).  The implied volatility in the options was approximately 31 when this position was established and there are no quarterly earnings or ex-dividends prior to the expiration date at the end of next week. 

The details of the associated transactions and a potential return-on-investment result are as follows:

1. MetLife Inc. (MET)
The transactions were as follows:
12/09/2015 Bought 300 MetLife Inc. @ $48.43
12/09/2015 Sold 3 MET Dec2015 $47.50 Call Options @ $1.51

A possible overall performance result (including commissions) for these MetLife Inc. covered calls is as follows:
Stock Purchase Cost: $14,536.95
= ($48.43*300+$7.95 commission)

Net Profit:
(a) Options Income: +$442.80
= 300*$1.51 - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MET assigned at $47.50) = -$286.95
= ($47.50-$48.43)*300 - $7.95 commissions

Total Net Profit (If MET assigned at $47.50): +$155.85
= (+$442.80 +$0.00 -$286.95)

Absolute Return if Assigned (at $47.50 strike price): +1.1%
= +$155.85/$14,536.95
Annualized Return If Assigned (ARIA): +39.1%
= (+$155.85/$14,536.95)*(365/10 days)

The downside 'breakeven price' at expiration is at $46.92 ($48.43 - $1.51), which is 3.1% below the current market price of $48.43.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Dec2015 options expiration) for this MetLife covered calls position is 65%. This compares with a probability of profit of 50.2% for a buy-and-hold of MET stock over the same time period. Using this probability of profit of 65%, the Expected Value annualized ROI of this investment (if held until expiration) is +25.4% (+39.1% * 65%).

The 'crossover price' at expiration is $49.94 ($48.43 + $1.51). This is the price above which it would have been more profitable to simply buy-and-hold MetLife stock until Decmber 18th (the Dec2015 options expiration date) rather than establish this covered calls position.

Established Position in Nationstar Mortgage Holdings Inc.

Today, the Covered Calls Advisor established a new position in Nationstar Mortgage Holdings Inc. (ticker symbol NSM) by selling three Jan2016 Put options at the $12.00 strike price when the price of the underlying stock was $11.68.

As detailed below, the Nationstar Mortgage Holdings Inc. investment will yield a +4.9% absolute return in 39 days (which is equivalent to a +46.2% annualized return-on-investment) if NSM stock is unchanged at $11.68.  If the stock value rises above the $12.00 strike at the Jan 15th expiration, a +7.6% absolute return (+71.2% annualized) will be achieved. 

The implied volatility in the options was 49 when this position was established; so the $.95 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     


1. Nationstar Mortgage Holdings Inc. (NSM) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
12/08/2015  Sold 3 NSM Jan2016 $12.00 100% cash-secured Put options @ $.95
Note: the price of NSM was $11.68 today when this transaction was executed.

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 Put options sold.

Two possible overall performance results (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $3,600.00
= $12.00*300
Note: the price of NSM was $11.68 when these options were sold

Net Profit:
(a) Options Income: +$273.80
= ($.95*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NSM is unchanged at $11.68 at Jan2016 expiration): -$96.00
= ($11.68 -$12.00)*300 shares; or
(c) Capital Appreciation (If NSM is above $12.00 strike price at Jan2016 expiration): +$0.00
= ($12.00-$12.00)*300 shares

Total Net Profit (If NSM is unchanged at $11.68 at Jan2016 expiration): +$177.80
= (+$273.80 options income +$0.00 dividend income -$96.00 capital appreciation); or
Total Net Profit (If NSM is above $12.00 strike price at Jan2016 options expiration): +$273.80
= (+$273.80 options income +$0.00 dividend income +$0.00 capital appreciation)

1. Absolute Return (If NSM is unchanged at $11.68 at Jan2016 expiration): +4.9%
= +$177.80/$3,600.00
Annualized Return if Unchanged: +46.2%
= (+$177.80/$3,600.00)*(365/39 days); or
2. Absolute Return if Assigned (If NSM is above $12.00 strike price at Jan2016 options expiration): +7.6%
= +$273.80/$3,600.00
Annualized Return: +71.2%
= (+$273.80/$3,600.00)*(365/39 days)

The downside 'breakeven price' at expiration is at $11.05 ($12.00 - $.95), which is 8.1% below the current market price of $11.68.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jan 15th, 2016 options expiration) for this Nationstar Mortgage short Puts position is 46%. This compares with a probability of profit of 50.3% for a buy-and-hold of Nationstar stock over the same time period. Using this probability of profit of 46%, the expected value annualized return-on-investment (if held until expiration and the stock price is unchanged at $11.68) is +21.3% (+46.2% * 46%).

The 'crossover price' at expiration is $12.63 ($11.68 + $.95).  This is the price above which it would have been more profitable to simply buy-and-hold NSM until Jan 15th (the Jan2016 options expiration date) rather than selling these Put options.

Established Covered Calls Position in iShares MSCI Emerging Markets ETF

Today, a covered calls position was established in iShares MSCI Emerging Markets ETF (ticker symbol EEM) with a Jan2016 expiration.  This position includes consideration of an upcoming semi-annual distribution with an ex-date of Dec 21st.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established (with the strike price of $32.00 being below the stock purchase price of $32.59).

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

If Early Assignment: +1.3% absolute return (equivalent to +37.8% annualized return for the next 13 days) if the stock is assigned early (business day prior to Dec 21 ex-date); OR

If Distribution Capture: +2.9% absolute return (equivalent to +27.0% annualized return over the next 39 days) if EEM is assigned at Jan2016 expiration on January 15th.

1. iShares MSCI Emerging Markets ETF (EEM) -- New Covered Calls Position
The estimated $.50 distribution of Dec 21st is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.50 [$1.09 option premium - ($32.59 purchase price - $32.00 strike price)] remaining in the short call option decays substantially by December 20th (the business day prior to the ex-date), then it is possible that the call options owner would exercise early and call the EEM shares away to capture the dividend. 

The transactions were:
12/08/2015 Bought 300 iShares MSCI Emerging Markets ETF shares @ $32.59
12/08/2015 Sold 3 EEM Jan2016 $32.00 Call options @ $1.09
Note: a simultaneous buy/write transaction was executed.
12/21/2015 Upcoming distribution estimated at $.50 per share

Two possible overall performance results (including commissions) for this EEM covered calls position are as follows:
Stock Purchase Cost: $9,784.95
= ($32.59*300+$7.95 commission)

Net Profit:
(a) Options Income: +$316.80
= ($1.09*300 shares) - $10.20 commissions
(b) Distribution Income (If option exercised early on business day prior to Dec 21st ex-date): +$0.00; or
(b) Distribution Income (If EEM assigned at Jan2016 expiration): +$150.00
= ($.50 distribution per share x 300 shares)

(c) Capital Appreciation (If EEM assigned early on Dec 15th): -$184.95
+($32.00-$32.59)*300 - $7.95 commissions; or
(c) Capital Appreciation (If EEM assigned at $32.00 at Jan2016 expiration): -$184.95
+($32.00-$32.59)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 21 ex-distribution date): +$131.85

= (+$316.80 +$0.00 -$184.95); or

Total Net Profit (If EEM assigned at $32.00 at Jan2016 expiration): +$281.85

= (+$316.80 +$150.00 -$184.95)

1. Absolute Return [If option exercised on Dec 20th (business day prior to ex-distribution date)]: +1.3%

= +$131.85/$9,784.95

Annualized Return (If option exercised early): +37.8%

= (+$131.85/$9,784.95)*(365/13 days); OR

2. Absolute Return (If EEM assigned at $32.00 at Jan2016 expiration): +2.9%

= +$281.85/$9,784.95

Annualized Return: +27.0%

= (+$281.85/$9,784.95)*(365/39 days)

Either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $32.00 strike price at assignment.  If EEM declines below the strike price, the breakeven price of $31.50 ($32.59 -$1.09) provides 3.3% downside protection below today's purchase price.

Established New Position in Enterprise Products Partners LP

Today, the Covered Calls Advisor established a new position in Enterprise Products Partners LP (ticker symbol EPD) by selling three Dec2015 Put options at the $21.00 strike price. This position is a conservative one since it was established with 3.0% downside protection to the strike price.

As detailed below, the Enterprise Products Partners investment will yield a +3.2% absolute return in 12 days (which is equivalent to a +96.5% annualized return-on-investment) if EPD closes above the $21.00 strike price on the Dec 18th options expiration date. 

This potential return is very nice given the downside protection (from the $21.64 stock price to the $21.00 strike price) when the position was established.  Because of the recent rapid decline in Master Limited Partnerships (MLPs), including another 5% today when this position was established, the implied volatility in the options had ballooned to 55; so the $.70 per share price when the Puts were sold is a very attractive premium received.     

1. Enterprise Products Partners LP (EPD) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/07/2015  Sold 3 EPD Dec2015 $21.00 100% cash-secured Put options @ $.70
Note: the price of EPD was $21.64 today when this transaction was executed.

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 Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $6,300.00
= $21.00*300
Note: the price of EPD was $21.64 when these options were sold

Net Profit:
(a) Options Income: +$199.80
= ($.70*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EPD is above $21.00 strike price at Dec2015 expiration): +$0.00
= ($21.00-$21.00)*300 shares

Total Net Profit (If EPD is above $21.00 strike price at Dec2015 options expiration): +$199.80
= (+$199.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If EPD is above $21.00 strike price at Dec2015 options expiration): +3.2%
= +$199.80/$6,300.00
Annualized Return: +96.5%
= (+$199.80/$6,300.00)*(365/12 days)

The downside 'breakeven price' at expiration is at $20.30 ($21.00 - $.70), which is 6.2% below the current market price of $21.64.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this EPD short Puts position is 65%. This compares with a probability of profit of 50.4% for a buy-and-hold of EPD stock over the same time period. Using this probability of profit of 65%, the expected value annualized return-on-investment (if held until expiration) is +62.7% (+96.5% * 65%), an extraordinarily high value for this investment.  

The 'crossover price' at expiration is $22.34 ($21.64 + $.70).  This is the price above which it would have been more profitable to simply buy-and-hold Enterprise Products Partners until the Dec2015 options expiration date