Early Assignment of General Motors Co. Covered Calls

Today, General Motors Co. (ticker symbol GM) is ex-dividend at $.38 per share.  The Covered Calls Advisor owned a GM March 2017 covered calls position at the $36.00 strike price.  Early this morning (as expected), I received email and text notifications from my broker (Schwab) that the 10 GM Call options were exercised early, so the 1,000 shares of GM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $36.00 strike price.

Details of the transactions and results for this GM position are provided below.  The shares had risen from $36.90 when purchased (on Feb 28th) to $37.52 at yesterday's market close.  The time value remaining in the Call options had declined to $0.02 (based on the $1.54 midpoint of the $1.53/$1.55 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 to purchase the 1,000 shares in order to capture the $.38 dividend.  In this advisor's experience, early assignment normally occurs only in those relatively deep-in-the-money positions (note: GM was 4.2% in-the-money at market close yesterday) when the Call options time value remaining near the end of trading on the day prior to the ex-div date is $.10 or less and the ex-dividend amount ($.38 in this case) is much greater than the time value the Call buyer forfeits ($.02 in this GM case).  It is also interesting to observe that the Pulte Mar2017 covered calls position (which also went ex-dividend today), also, just like the GM position, had only $.02 of time value remaining -- but those Calls were not exercised (likely because today's ex-dividend amount for Pulte is only $.09). 

The actual return-on-investment result for this closed position was a +0.8% absolute return (equivalent to +33.6% annualized return) for the 9 days holding period.  This result was slightly below the +37.7% annualized ROI that would have occurred if the covered calls had instead been held until expiration and if the options were exercised then.


General Motors Co. (GM) -- Covered Calls Position Closed

The transactions were:
02/28/2017 Bought 1,000 GM shares @ $36.90
02/28/2017 Sold 10 GM Mar2017 $36.00 Call options @ $1.22
Note: a simultaneous buy/write transaction was executed.
03/07/2017 10 Call options exercised and 1,000 shares GM stock sold at $36.00 strike price

The overall performance result (including commissions) for this General Motors covered calls position were as follows:
Stock Purchase Cost: $36,906.95
= ($36.90*1,000+$6.95 commission)

Net Profit:
(a) Options Income: +$1,213.00
= ($1.22*1,000 shares) - $7.00 commissions
(b) Dividend Income (Options exercised early on business day prior to Mar 8th ex-div date): +$0.00

(c) Capital Appreciation: -$906.95
+($36.00-$36.90)*1,000 - $6.95 commissions

Total Net Profit: +$306.05

= (+$1,213.00 options income +$0.00 dividend income -$906.95 capital appreciation)

Absolute Return: +0.8%

= +$306.05/$36,906.95

Annualized Return: +33.6%

= (+$306.05/$36,906.95)*(365/9 days)

Established Short Put Options Position in Energy Transfer Equity LP

Today, a new position was established in Energy Transfer Equity LP (ticker ETE) with an Apr2017 options expiration at the $18.00 strike price.  These short Puts were chosen since they provide a slightly higher potential return-on-investment result than their comparable Covered Calls.  The Covered Calls Advisor does not use margin, so 100% cash-secured Put options were sold.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative investment was made with the strike price below the stock price when the position was established.  There is not a quarterly earnings report or ex-dividend date prior to the Apr2017 options expiration date. 

As detailed below, the potential return is +2.8% absolute return in 47 days (equivalent to a +21.9% annualized return-on-investment).
Note: the Implied Volatility (IV) of the options at the time they were sold was 31.6, so these options exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment for the conservative risk profile of this position.  


Energy Transfer Equity LP (ETE) -- New 100% Cash-Secured Puts Position

The transactions were as follows:
03/06/2017 Sold 10 ETE Apr2017 $18.00 100% cash-secured Put options @ $.52
Note: the price of ETE was $18.99 when these Puts were sold

A possible overall performance result (including commissions) for this Energy Transfer position is as follows:
Stock Cost Basis: $18,000.00
= $18.00*1,000 shares

Net Profit:
(a) Options Income: +$508.55
= ($.52*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If price of ETE stock is above $18.00 strike price at Apr2017 options expiration date): +$0.00
=+($18.00-$18.00)*1,000 shares

Total Net Profit (If Energy Transfer stock is assigned at $18.00 at Apr2017 expiration): +$508.55

= (+$508.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.8%

= +$508.55/$18,000.00

Annualized Return: +21.9%

= (+$508.55/$18,000.00)*(365/47 days)

The downside 'breakeven price' at expiration is at $17.48 ($18.00 - $.52), which is 8.0% below the current market price of $18.99.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the April 21st, 2017 options expiration) for this ETE short Puts position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of ETE shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +14.8% (+21.9% * 67.8%), a nice risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $19.51 ($18.99 + $.52).  This is the price above which it would have been more profitable to simply buy-and-hold ETE until the Apr2017 options expiration date rather than selling these Put options.

Established New Covered Calls Position in PulteGroup, Inc.

Today, a covered calls positions were established in PulteGroup, Inc. (ticker symbol PHM) with a Mar2017 expiration and at the $22.00 strike price.  This position has an upcoming quarterly ex-dividends on March 8th of $.09 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the March 17th options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a slightly in-the-money covered calls position was established. 

As detailed below, potential return-on-investment result is +1.1% absolute return (equivalent to +78.3% annualized return for the next 5 days) if the stock is assigned early (business day prior to Mar 8th ex-date); OR +1.5% absolute return (equivalent to +36.0% annualized return over the next 15 days) if the stock is assigned at the Mar2017 expiration on March 17th.


PulteGroup, Inc. (PHM) -- New Covered Calls Position

The $.09 dividend of Mar 8th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.25 [$.48 option premium - ($22.23 stock price - $22.00 strike price)] remaining in the short call option decays to about $.10 or less by March 7th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the PulteGroup shares away to capture the dividend.

The transactions were:
03/03/2017 Bought 1,000 PHM shares @ $22.23
03/03/2017 Sold 10 PHM Mar2017 $22.00 Call options @ $.48
Note: a simultaneous buy/write transaction was executed.
03/08/2017 Upcoming ex-dividend of $.09 per share

Two possible overall performance results (including commissions) for this PulteGroup, Inc. covered calls position are as follows:
Stock Purchase Cost: $22,234.95
= ($22.23*1,000+$4.95 commission)
Note: In the category of "I never thought I'd see the day that...", effective today, Schwab stock commission decreases from $6.95 to $4.95 (and to $.65 per option contract).

Net Profit:
(a) Options Income: +$473.50
= ($.48*1,000 shares) - $6.50 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 8th ex-div date): +$0.00; or
(b) Dividend Income (If PHM shares assigned at Mar2017 expiration): +$90.00
= ($.09 dividend per share x 1,000 shares)

(c) Capital Appreciation (If PHM assigned early on Mar 7th): -$234.95
+($22.00-$22.23)*1,000 - $4.95 commissions; or
(c) Capital Appreciation (If PHM assigned at $22.00 at Mar2017 expiration): -$234.95
+($22.00-$22.23)*1,000 - $4.95 commissions

Total Net Profit (If option exercised on day prior to Mar 8th ex-dividend date): +$238.55

= (+$473.50 +$0.00 -$234.95); or

Total Net Profit (If PHM assigned at $22.00 at Mar2017 expiration): +$328.55

= (+$473.50 +$90.00 -$234.95)

1. Absolute Return [If option exercised on Mar 7th (business day prior to ex-dividend date)]: +1.1%

= +$238.55/$22,234.95

Annualized Return (If option exercised early): +78.3%

= (+$238.55/$22,234.95)*(365/5 days); OR

2. Absolute Return (If PHM assigned at $36.00 at Mar2017 expiration): +1.5%

= +$328.55/$22,234.95

Annualized Return: +36.0%

= (+$328.55/$22,234.95)*(365/15 days)

In this instance, early assignment provides higher annualized return, so that outcome is preferable -- but either outcome would provide a very good return-on-investment result.  These returns will be achieved as long as the stock is above the $22.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $21.66 ($22.23 -$.09 -$.48) provides 2.6% downside protection below today's purchase price.

The 'crossover price' at expiration is $22.62 ($22.23 - $.09 + $.48).  This is the price above which it would have been more profitable to simply buy-and-hold Pulte stock until the Mar2017 options expiration date rather than selling these Put options.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a potential for dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this PulteGroup position, ten of eleven criteria were achieved.

Dick's Sporting Goods Position Closed

This morning, the Covered Calls Advisor closed the five Mar2017 $48.00 100% cash-secured Put options position in Dick's Sporting Goods Inc. (ticker DKS).  Recent disappointing 4th quarter earnings reports from stalwart brick-and-mortar retailers such as Walmart and Target as well as Best Buy just this morning, have reinforced to me the ongoing disruptive nature of Amazon.com and consumers' growing acceptance of online shopping. So, brick-and-mortar retailer Dick's is likely not immune from this trend and their upcoming 4th quarter earnings report on March 7th seems increasingly likely to also be met with disappointment.  The details of this position are presented below.

Dick's Sporting Goods Inc. (DKS) --
The transaction was as follows:
02/14/2017  Sold 5 DKS 100% cash-secured $48.00 Put options with Mar2017 expirations @ $1.60
Note: the price of Dick's stock was $50.91 today when this transaction was executed.
03/01/2017 Bought-to-Close 5 DKS Mar2017 $48.00 Puts @ $1.55
Note: the price of Dick's stock was $50.22 today when this position was closed

A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $24,000.00
= $48.00*500 shares

Net Income:
 (a) Options Income: +$18.00
= ($1.60 - $1.55) * 500 shares - 2* $3.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($48.00 -$48.00)*500 shares

Total Net Profit: +$18.00
= (+$18.00 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +0.1%
= +$18.00/$24,000.00
Annualized Return: +1.8%
= (+$18.00/$24,000.00)*(365/15 days)