December 2015 Option Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained eleven positions with December 2015 expirations.  The results are as follows:

- Four of the eleven positions (Alibaba Group Holding Ltd., AmTrust Financial Services Inc., Enterprise Products Partners LP, and Nationstar Mortgage Holdings Inc.) were closed out at expiration. This was the optimal outcome for these positions in that the maximum potential return-on-investment (ROI) results were achieved:

• Alibaba Group Holding Ltd. = +5.0% absolute return (equivalent to +49.5% annualized return for the 37 days holding period)
• AmTrust Financial Services Inc. = +1.0% absolute return (equivalent to +23.4% annualized return for the 16 days holding period)
• Enterprise Products Partners LP = +3.2% absolute return (equivalent to +96.5% annualized return for the 12 days holding period)
• Nationstar Mortgage Holdings Inc. = +3.1% absolute return (equivalent to +45.3% annualized return for the 25 days holding period)

The transactions history and results for each of these positions is detailed below. The cash available from the closing of these positions will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.  Any new positions will be posted on this site on the same day they occur.

- Seven of the eleven positions (Avis Budget Group Inc., Cal-Maine Foods Inc., Devon Energy Corp, Goldman Sachs Group Inc., MetLife Inc., Kinder Morgan Inc., and Polaris Industries Inc.) ended at expiration with the price of the stock below the strike price, so the options expired and the long shares are now retained in the Covered Calls Advisor Portfolio.   Decisions will be made soon to either sell these shares or to establish covered calls positions by selling future Call options against the current long stock holdings. When these decisions are made and the accompanying transactions completed, posts to this blog will be made on the same day they occur along with the detailed transactions to-date.

Details of the four closed positions summarized above and their associated return-on-investment results are as follows:

1. Alibaba Group Holding Ltd (BABA) -- Position Closed
The transactions were as follows:
11/12/2015  Sold 2 BABA 100% cash-secured $80.00 Put options @ $2.16
Note: the price of Alibaba was $78.90 today when this transaction was executed. The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the two Put options sold.
11/20/2015 Bought 200 shares BABA @ $80.00 strike price
Note: the price of BABA was $79.95 upon Nov2015 options expiration
11/23/2015 Established covered calls position by selling two BABA Dec2015 $77.50 Call options @ $4.45
12/18/2015 200 BABA shares sold at $77.50 strike price
Note: BABA shares closed at $82.65 at 12/18/2015 options expiration.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $16,000.00
= $80.00*200

Net Profit:
(a) Options Income: +$1,303.10
= ($2.16+$4.45) * 200 shares - $9.45*2 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA was above $77.50 strike price at Dec2015 expiration): -$500.00
= ($77.50 -$80.00)*200 shares

Total Net Profit: +$803.10
= (+$1,303.10 options income +$0.00 dividend income -$500.00 capital appreciation)

Absolute Return: +5.0%
= +$803.10/$16,000.00
Annualized Return: +49.5%
= (+$803.10/$16,000.00)*(365/37 days)


2. AmTrust Financial Services Inc.(AFSI) -- Postion Closed

The transactions were as follows:
12/03/2015  Sold 3 AFSI Dec2015 $60.00 100% cash-secured Put options @ $.65
Note: the price of AFSI was $62.55 today when this transaction was executed.
12/18/2015 3 AFSI Put options expired
Note: AFSI shares closed at $60.54 at 12/18/2015 options expiration.

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

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $18,000.00
= $60.00*300

Net Profit:
(a) Options Income: +$184.80
= ($.65*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (AFSI closed above $60.00 strike price at Dec2015 expiration): +$0.00
= ($60.00-$60.00)*300 shares

Total Net Profit (AFSI closed above $60.00 strike price at Dec2015 options expiration): +$184.80
= (+$184.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.0%
= +$184.80/$18,000.00
Annualized Return: +23.4%
= (+$184.80/$18,000.00)*(365/16 days)


3. Enterprise Products Partners (EPD) -- Position Closed

The transactions were 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.
12/18/2015 3 EPD Put options expired
Note: EPD shares closed at $23.43 at 12/18/2015 options expiration.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $6,300.00
= $21.00*300

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

Total Net Profit: +$199.80
= (+$199.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +3.2%
= +$199.80/$6,300.00
Annualized Return: +96.5%
= (+$199.80/$6,300.00)*(365/12 days)


4. Nationstar Mortgage Holdings Inc. (NSM) -- Position Closed
The transactions were as follows:
11/24/2015  Sold 4 NSM Dec2015 $12.00 100% cash-secured Put options @ $.40
Note: the price of NSM was $12.89 today when this transaction was executed.
12/18/2015 4 NSM Put options expired
Note: NSM shares closed at $12.39 at 12/18/2015 options expiration.

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $4,800.00
= $12.00*400

Net Profit:
(a) Options Income: +$149.05
= ($.40*400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (NSM was above $12.00 strike price at Dec2015 expiration): +$0.00
= ($12.00-$12.00)*400 shares

Total Net Profit: +$149.05
= (+$149.05 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +3.1%
= +$149.05/$4,800.00
Annualized Return: +45.3%
= (+$149.05/$4,800.00)*(365/25 days)

Established New Position in AmTrust Financial Services Inc.

Today, the Covered Calls Advisor established a new position in AmTrust Financial Services Inc. (ticker symbol AFSI) by selling three Jan2016 Put options at the $57.50 strike price. This position is a conservative one since it was established with 5.3% downside protection to the strike price.

As detailed below, the AmTrust Financial Services Inc. investment will yield a +1.7% absolute return in 29 days (which is equivalent to a +23.4% annualized return-on-investment) if AFSI closes above the $57.50 strike price on the Jan 15th options expiration date. 

This potential return is very nice given the downside protection (from the $60.70 stock price to the $57.50 strike price) when the position was established.  The implied volatility in the options was 32 when this position was established; so the $1.00 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1. AmTrust Financial Services Inc.(AFSI) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/18/2015  Sold 3 AFSI Jan2016 $57.50 100% cash-secured Put options @ $1.00
Note: the price of AFSI was $60.70 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: $17,250.00
= $57.50*300
Note: the price of AmTrust Financial was $60.70 when these options were sold

Net Profit:
(a) Options Income: +$289.80
= ($1.00*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AFSI is above $57.50 strike price at the Jan2016 expiration): +$0.00
= ($57.50-$57.50)*300 shares

Total Net Profit (If AFSI is above $57.50 strike price at Jan2016 options expiration): +$289.80
= (+$289.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If AFSI is above $57.50 strike price at the Jan2016 options expiration): +1.7%
= +$289.80/$17,250.00
Annualized Return: +23.4%
= (+$289.80/$17,250.00)*(365/29 days)

The downside 'breakeven price' at expiration is at $56.50 ($57.50 - $1.00), which is 6.9% below the current market price of $60.70.

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 AFSI short Puts position is 73%. This compares with a probability of profit of 50.3% for a buy-and-hold of AmTrust Financial stock over the same time period. Using this probability of profit of 73%, the expected value annualized return-on-investment (if held until expiration) is +17.1% (+23.4% * 73%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $61.70 ($60.70 + $1.00).  This is the price above which it would have been more profitable to simply buy-and-hold AmTrust Financial until the Jan2016 options expiration date rather than selling these Put options.

Established Covered Calls in Apple Inc. and JPMorgan Chase & Co.

Yesterday, Covered Calls positions with Jan2016 options expirations were established in Apple Inc. (ticker symbol AAPL) and JPMorgan Chase & Co. (JPM).

Apple was established as a Covered Calls position (rather than a comparable short 100% cash-secured Puts position) since the Implied Volatility (IV) was about one point higher (about 30) with the Calls than for the comparable Puts -- so the potential return-on-investment for the Covered Calls position was slightly higher than its comparable 100% cash-secured Puts position.

The JPMorgan position explicitly considers the potential for capturing the upcoming quarterly dividend of $.44 (ex-div date is Jan 4th, 2016). Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative in-the-money investments were made for both positions (with the strike prices below the stock prices when the positions were established).

As detailed below, the potential returns are:
1. Apple Inc.: +2.0% absolute return in 36 days (equivalent to a +20.5% annualized return-on-investment)
2. JPMorgan Chase Inc.: +2.2% absolute return in 36 days (equivalent to a +22.8% annualized return-on-investment) 
Note: The IV for the Call options at the time they were sold was 30 for Apple and 26 for JPMorgan, so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.  

The transactions and potential return-on-investment results for each position are detailed below:

1.  Apple Inc. (AAPL) -- New Covered Calls Position
The transactions were as follows:
12/11/2015  Bought 200 Apple Inc. shares @ $113.80
12/11/2015 Sold 2 AAPL Jan2016 $110.00 Call options @ $6.15
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 200 shares AAPL: $22,767.95
= $113.80*200 + $7.95 commission

Net Profit:
(a) Options Income: +$1,228.50
= ($6.15*200 shares) - $1.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL is above $110.00 strike price at Jan2016 expiration): -$767.95
= ($110.00-$113.80)*200 shares - $7.95 commissions

Total Net Profit (If AAPL is above $110.00 strike price at Jan2016 options expiration): +$460.55
= (+$1,228.50 options income +$0.00 dividends -$767.95 capital appreciation)

Absolute Return (If AAPL is above $110.00 strike price at Jan2016 options expiration): +2.0%
= +$460.55/$22,767.95
Annualized Return: +20.5%
= (+$460.55/$22,767.95)*(365/36 days)

The downside 'breakeven price' at expiration is at $107.65 ($113.80 - $6.15), which is 5.4% below the current market price of $113.80.

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 Apple Inc. covered calls position is 65%. This compares with a probability of profit of 50.3% for a buy-and-hold of Apple Inc. 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 +13.3% (+20.5% * 65%).

The 'crossover price' at expiration is $116.15 ($110.00 + $6.15).  This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until Jan 15th (the Jan2016 options expiration date) rather than establishing this covered calls position.


2. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position

A $.44 quarterly dividend goes ex-dividend on January 4th, 2016.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.05 [$3.32 option premium - ($64.77 stock price - $62.50 strike price)] remaining in the short call options decay substantially below the $.44 dividend amount by Dec 31st (the last business 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: +1.6% absolute return (equivalent to +23.9% annualized return for the next 24 days) if the stock is assigned early (on last business day prior to Jan 4th ex-div date); OR

If Dividend Capture:  +2.2% absolute return (equivalent to +22.8% annualized return over the next 36 days) if the stock is assigned at Jan2016 expiration on January 15th.

12/11/2015 Bought 200 JPM shares @ $64.77
12/11/2015 Sold 2 JPM Jan2016 $62.50 Call options @ $3.32
01/04/2016 Upcoming ex-dividend of $.44 per share

Two possible overall performance results (including commissions) for this JPMorgan Chase & Co.(JPM) covered calls position are as follows:
Stock Purchase Cost: $12,961.95
= ($64.77*200+$7.95 commission)

Net Profit:
(a) Options Income: +$665.50
= ($3.32*200 shares) - $1.50 commissions
(b) Dividend Income (If option exercised early on business day prior to Jan 4th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Jan2016 expiration): +$88.00
= ($.44 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Dec 31st): -$461.95
+($62.50 -$64.77)*200 - $7.95 commissions; or
(c) Capital Appreciation (If stock assigned at $62.50 at Jan2016 expiration): -$461.95
+($62.50 -$64.77)*200 - $7.95 commissions

Total Net Profit (If option exercised on last business day prior to Jan 4th ex-div date): +$203.55

= (+$665.50 +$0.00 -$461.95); or

Total Net Profit (If stock assigned at $62.50 at Jan2016 expiration): +$291.55

= (+$665.50 +$88.00 -$461.95)

1. Absolute Return (If option exercised on last business day prior to ex-div date): +1.6%

= +$203.55/$12,961.95

Annualized Return (If option exercised early): +23.9%

= (+$203.55/$12,961.95)*(365/24 days); OR

2. Absolute Return (If stock assigned at $62.50 at Jan2016 expiration): +2.2%

= +$291.55/$12,961.95

Annualized Return (If stock assigned): +22.8%

= (+$291.55/$12,961.95)*(365/36 days)

Early assignment in this JPM position would provide a slightly higher annualized return if the Call options are exercised early.  So, this would be the Covered Calls Advisor's preferred outcome; but either outcome provides an attractive return result.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  Alternatively, if the stock declines below the strike price, the breakeven price of $61.45 ($64.77 - $3.32) provides 5.1% of downside protection. 

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In summary, these are both relatively conservative covered calls investments that provide nice annualized ROI potential if they remain at or above the strike price at the January 2016 options expiration date.

Established Covered Calls Position in Paccar Inc.

Today, a covered calls position was established in Paccar Inc. (ticker symbol PCAR) with a Jan2016 expiration.  This position includes consideration of an upcoming special dividend with an ex-div date of Dec 16th.  A generous $1.40 special dividend is being provided because of the positive year-to-year sales trend in Paccar's two primary markets (U.S. and Europe).  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 $45.00 being below the stock purchase price of $48.97).

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

If Early Assignment: +0.8% absolute return (equivalent to +51.3% annualized return for the next 6 days) if the stock is assigned early (business day prior to Dec 16 ex-date); OR

If Dividend Capture: +3.7% absolute return (equivalent to +36.5% annualized return over the next 37 days) if the stock is assigned at Jan2016 expiration on January 15th.

1. Paccar Inc. (PCAR) -- New Covered Calls Position

The $1.40 special dividend of Dec 16th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.50 [$4.47 option premium - ($48.97 stock price - $45.00 strike price)] remaining in the short call option decays substantially by December 15th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the PCAR shares away to capture the dividend.

The transactions were:
12/10/2015 Bought 200 PCAR shares @ $48.97
12/10/2015 Sold 2 PCAR Jan2016 $45.00 Call options @ $4.47
Note: a simultaneous buy/write transaction was executed.
12/16/2015 Upcoming special dividend of $1.40 per share

Two possible overall performance results (including commissions) for this PCAR covered calls position are as follows:
Stock Purchase Cost: $9,801.95
= ($48.97*200+$7.95 commission)

Net Profit:
(a) Options Income: +$884.55
= ($4.47*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Dec 16th ex-dividend date): +$0.00; or
(b) Dividend Income (If PCAR assigned at Jan2016 expiration): +$280.00
= ($1.40 dividend per share x 200 shares)

(c) Capital Appreciation (If PCAR assigned early on Dec 15th): -$801.95
+($45.00-$48.97)*200 - $7.95 commissions; or
(c) Capital Appreciation (If PCAR assigned at $45.00 at Jan2016 expiration): -$801.95
+($45.00-$48.97)*200 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 16 ex-div date): +$82.60

= (+$884.55 +$0.00 -$801.95); or

Total Net Profit (If PCAR assigned at $45.00 at Jan2016 expiration): +$362.60

= (+$884.55 +$280.00 -$801.95)

1. Absolute Return [If option exercised on Dec 15th (business day prior to ex-dividend date)]: +0.8%

= +$82.60/$9,801.95

Annualized Return (If option exercised early): +51.3%

= (+$82.60/$9,801.95)*(365/6 days); OR

2. Absolute Return (If PCAR assigned at $45.00 at Jan2016 expiration): +3.7%

= +$362.60/$9,801.95

Annualized Return: +36.5%

= (+$362.60/$9,801.95)*(365/37 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 $45.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $44.50 ($48.97 -$4.47) provides 9.1% downside protection below today's purchase price.