Early Assignment of Eli Lilly and Company Covered Calls

The Covered Calls Advisor had an Eli Lilly and Company (ticker LLY) November 2016 covered calls position at the $75 strike price.  Early this morning, I received email notification from my broker (Schwab) that the 4 LLY Call options were exercised early, so the 400 shares of Lilly stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $75 strike price.

Details of the transactions and results for this Eli Lilly covered calls position are provided below.  The LLY shares had risen from $76.76 when purchased (on October 26th) to $78.39 at yesterday's market close.  The time value remaining in the Call options had declined to $0.00 (based on the midpoint of the $3.20/$3.55 bid/ask spread at the market close yesterday) -- so it was expected that the owner of the Call options would exercise his/her option early in order to purchase the 400 shares and thus capture the dividend.  In this advisor's experience, early assignment normally occurs only in those relatively deep-in-the-money positions when there is less than $.15 time value remaining near the end of trading on the day prior to the ex-div date. 

As detailed below, the actual return-on-investment result for this closed position was a +1.3% absolute return (equivalent to +32.7% annualized return) for the 14 days holding period.  This result was slightly better than the 30.4% annualized ROI that would have occurred if the covered calls had instead been held until expiration and if the options were exercised then.


The transactions history was as follows:

10/26/2016 Bought 400 LLY shares @ $76.76
10/26/2016 Sold 4 LLY Nov2016 $75.00 Call options @ $2.75
Note: a simultaneous buy/write transaction was executed.
11/10/2016 Quarterly ex-dividend of $.51 per share
11/09/2016 4 LLY Call options assigned and associated 400 LLY shares sold at $75.00 strike price.  Note: the price of LLY stock was $78.39 at yesterday's market close.

The overall performance result (including commissions) for this Eli Lilly covered calls position was as follows:
Stock Purchase Cost: $30,711.95
= ($76.76*400+$7.95 commission)

Net Profit:
(a) Options Income: +$1,097.00
= ($2.75*400 shares) - $3.00 commissions
(b) Dividend Income (Call options exercised early on business day prior to Nov 10th ex-div date): +$0.00

(c) Capital Appreciation (Early assignment on Nov 9th): -$311.95
+($75.00 sale price - $76.76 purchase price)*400 shares - $7.95 commissions

Total Net Profit (Call options exercised on day prior to Nov 10th ex-dividend date): +$385.05

= (+$1,097.00 options income +$0.00 dividend income -$711.95 capital appreciation)

Absolute Return: +1.3%

= +$385.05/$30,711.95

Annualized Return (Call options were exercised early): +32.7%

= (+$385.05/$30,711.95)*(365/14 days)

The cash now available from the closing of this Lilly covered calls position 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.

Established Covered Calls Position in Blackstone Group LP

Today, a covered calls position was established in Blackstone Group LP (ticker symbol BX) with a Dec2016 expiration.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established with the strike price of $23.00 below the stock purchase price of $23.59.

As detailed below, the potential returns are:
Blackstone Group LP: +2.3% absolute return in 39 days (equivalent to a +21.2% annualized return-on-investment)

Note: This potential result exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  

The transactions and a potential return-on-investment result is as follows:

1.  Blackstone Group LP (BX) -- New Covered Calls Position
The transactions were as follows:
11/08/2016  Bought 1,000 Blackstone shares @ $23.59
11/08/2016 Sold 10 BX Dec2016 $23.00 Call options @ $1.14
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 1,000 shares BX: $23,597.95
= $23.59*1,000 + $7.95 commission

Net Profit:
(a) Options Income: +$1,132.50
= ($1.14*1,000 shares) - $7.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BX is above $23.00 strike price at Dec2016 expiration): -$597.95
= ($23.00-$23.59)*1,000 shares - $7.95 commissions

Total Net Profit (If BX is above $23.00 strike price at Dec2016 options expiration): +$534.55
= (+$1,132.50 options income +$0.00 dividends -$597.95 capital appreciation)

Absolute Return (If BX remains above $23.00 strike price at Dec2016 options expiration): +2.3%
= +$534.55/$23,597.95
Annualized Return: +21.2%
= (+$534.55/$23,597.95)*(365/39 days)

The downside 'breakeven price' at expiration is at $22.45 ($23.59 - $1.14), which is 4.8% below the current market price of $23.59.

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 16th, 2016 options expiration) for this Blackstone Group covered calls position is 59%. This compares with a probability of profit of 50.2% for a buy-and-hold of Blackstone stock over the same time period. Using this probability of profit of 59%, the Expected Value annualized ROI of this investment (if held until expiration) is +12.5% (+21.2% * 59%).

The 'crossover price' at expiration is $24.73 ($23.59 + $1.14).  This is the price above which it would have been more profitable to simply buy-and-hold Blackstone stock until Dec 16th (the Dec2016 options expiration date) rather than establishing this covered calls position.

Established Short 100% Cash-Secured Puts Position in JetBlue Airways Corp.

Today, the Covered Calls Advisor established a 100% cash-secured Puts position in JetBlue Airways Corp. (Symbol JBLU) by selling 10 Nov2016 Put options at the $17.00 strike price. This position indicates that the Covered Calls Advisor is willing to purchase JetBlue shares at $17.00 (for future covered calls investments) upon the market close on Nov 18th if the stock declines to below $17.00 at that time.  This is a slightly conservative investment since JBLU stock was at $17.45 (2.6% above the strike price) when this position was established.

As detailed below, this investment will achieve a +1.7% absolute return in 18 days (which is equivalent to a +33.9% annualized return) if the JBLU stock price remains above $17.00 at the November 18th options expiration date.

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

1.  JetBlue Airways Corp. (JBLU) -- New Position
The transaction was as follows:
11/01/2016 Sold 10 JBLU Nov2016 $17.00 Puts @ $.30
Note: The price of JBLU was $17.45 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 ten Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $17,000.00
= $17.00*1,000


Net Profit:
(a) Options Income: +$284.55
= ($.30*1,000 shares) - $15.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If JBLU is above $17.00 strike price at Nov2016 expiration): +$0.00
= ($17.00-$17.00)*1,000 shares

Total Net Profit (If JBLU is above $17.00 strike price upon the Nov2016 options expiration): +$284.55
= (+$284.55 +$0.00 +$0.00)

Absolute Return (If JBLU is above $17.00 strike price at Nov2016 options expiration): +1.67%
= +$284.55/$17,000.00
Annualized Return: +33.9%
= (+$284.55/$17,000.00)*(365/18 days)

The downside 'breakeven price' at expiration is at $16.70 ($17.00 - $.30), which is 4.3% below the current market price.
The 'crossover price' at expiration is $17.75 ($17.45 + $.30).  This is the price above which it would have been more profitable to simply buy-and-hold JetBlue stock until November 18th (the Nov2016 options expiration date) rather than holding this short Put options position.

Established Covered Calls Position in Apple Inc.

Today, a covered calls position was established in Apple Inc. (ticker symbol AAPL) with a Nov2016 expiration.  This covered calls position includes consideration of an upcoming $.57 quarterly dividend with an ex-div date of Nov. 3rd (the day after tomorrow). Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered call position was established with the strike price of $110.00 below the stock purchase price of $112.56.

As detailed below, the potential returns are:
Apple Inc.: +1.0% absolute return in 18 days (equivalent to a +19.9% annualized return-on-investment)

Note: This potential result is very close to the Covered Calls Advisor's desired threshold of 20% annualized return-on-investment.  

The transactions and a potential return-on-investment result is as follows:

1.  Apple Inc. (AAPL) -- New Covered Calls Position
The transactions were as follows:
11/01/2016  Bought 300 Apple Inc. shares @ $112.56
11/01/2016 Sold 3 AAPL Nov2016 $110.00 Call options @ $3.13
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 300 shares AAPL: $33,775.95
= $112.56*300 + $7.95 commission

Net Profit:
(a) Options Income: +$936.75
= ($3.13*300 shares) - $2.25 commissions
(b) Dividend Income: +$171.00 = $.57 * 300 shares
(c) Capital Appreciation (If AAPL is above $110.00 strike price at Nov2016 expiration): -$775.95
= ($110.00-$112.56)*300 shares - $7.95 commissions

Total Net Profit (If AAPL is above $110.00 strike price at Nov2016 options expiration): +$331.80
= (+$936.75 options income +$171.00 dividends -$775.95 capital appreciation)

Absolute Return (If AAPL is above $110.00 strike price at Jan2016 options expiration): +1.0%
= +$331.80/$33,775.95
Annualized Return: +19.9%
= (+$331.80/$33,775.95)*(365/18 days)

The downside 'breakeven price' at expiration is at $108.86 ($112.56 - $3.13 -$.57), which is 3.3% below the current market price of $112.56.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Nov 18th, 2016 options expiration) for this Apple Inc. covered calls position is 73%. 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 73%, the Expected Value annualized ROI of this investment (if held until expiration) is +14.5% (+19.9% * 73%).

The 'crossover price' at expiration is $115.12 ($112.56 + $3.13 - $.57).  This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until Nov 18th (the Nov2016 options expiration date) rather than establishing this covered calls position.