Established Covered Calls Position in JPMorgan Chase & Co.

Today, a Covered Calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) with an April 20th, 2018 expiration and at the $110.00 strike price.  Although not yet declared, there is an expected upcoming quarterly ex-dividend near April 4th of $.56 per share.  The potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the April 20th, 2018 options expiration date.  The next quarterly earnings report is scheduled for April 13th, so it will be possible to capture the dividend and then decide whether to liquidate the shares prior to the earnings report or to hold the position through earnings.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Neutral, a slightly in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +2.0% absolute return (equivalent to +24.9% annualized return for the next 29 days) if the stock is assigned early (business day prior to the April 4th ex-date); OR +2.5% absolute return (equivalent to +20.1% annualized return over the next 45 days) if the stock is assigned on the April 20th options expiration date.


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

Although unlikely, if the current time value (i.e. extrinsic value) of $2.30 [$5.65 option premium - ($113.35 stock price - $110.00 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by April 3rd (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 200 JPM shares away to capture the dividend payment.

The transactions were:
03/07/2018 Bought 200 JPM shares @ $113.35
03/07/2018 Sold 2 JPM 4/20/2018 $110.00 Call options @ $5.65
Note: a simultaneous buy/write transaction was executed.
04/04/2018 Upcoming quarterly ex-dividend of $.56 per share

Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost: $22,674.95
= ($113.35 - $5.65) *200 + $4.95 commission

Net Profit:
(a) Options Income: +$1,123.71
= ($5.65*200 shares) - $6.29 commissions
(b) Dividend Income (If option exercised early on April 3rd, the business day prior to April 4th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Apr 20th, 2018 expiration): +$112.00
= ($.56 dividend per share x 200 shares)

(c) Capital Appreciation (If JPM assigned early): -$674.95
+($110.00 -$113.35)*200 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $110.00 strike price at expiration): -$674.95
+($110.00-$113.35)*200 - $4.95 commissions

1. Total Net Profit [If option exercised on Apr 3rd (business day prior to April 4th ex-dividend date)]: +$448.76

= (+$1,123.71 +$0.00 -$674.95); or

2. Total Net Profit (If JPM assigned at $110.00 at Apr 20th, 2018 expiration): +$560.76

= (+$1,123.71 +$112.00 -$674.95)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +2.0%

= +$448.76/$22,674.95

Annualized Return (If option exercised early): +24.9%

= (+$448.76/$22,674.95)*(365/29 days); or

2. Absolute Return (If JPM assigned at $110.00 at Apr 20, 2018 expiration): +2.5%

= +$560.76/$22,674.95

Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +20.1%

= (+$560.76/$22,674.95)*(365/45 days)

Either outcome provides a satisfactory return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $110.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $107.14 ($113.35 -$5.65 -$.56) provides 5.5% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, nine of the eleven criteria are achieved for this JPMorgan position.

Covered Calls Established in Sinclair Broadcast Group Inc.

Today, a Covered Calls position was established in Sinclair Broadcast Group, Inc. (ticker SBGI) for the March 16th expiration and at the $33.00 strike price.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a slightly in-the-money position was established.

The Implied Volatility of these Call options was 38.3 when this position was established.  This is noticeably higher than the average Historic Volatility for Sinclair so far this year, so selling these Call options premiums at this time seems very advantageous, especially since there is no quarterly earnings report in the next 10 days prior to expiration.  In addition, there is an upcoming ex-dividend of $.18 tomorrow which is included in the analysis below.

Sinclair is 'Buy'-rated by Reuters -- the highest of their five rating categories.  To put that in context, of the Analysts' consensus ratings reported by Reuters (8 Analysts currently follow SBGI), only 6.5% of 3,608 optionable stocks are now 'Buy'-rated.  I also like investing now in companies that will benefit substantially this year from the corporate tax rate reduction and Sinclair certainly qualifies since their 2017 tax rate was 31.3%. 

As detailed below, a potential outcome for this investment is a +2.4% absolute return-on-investment for the next 10 days (equivalent to +86.4% on an annualized return basis) if the stock closes above the $33.00 strike price on the March 16th options expiration date.

Sinclair Broadcast Group Inc. (SBGI) -- New Covered Calls Position

The transactions were as follows:
03/07/2018 Bought 400 shares of Sinclair stock @ $33.40 per share 
03/07/2018 Sold 4 Sinclair March 16th, 2018 $33.00 Call options @ $1.00 per share
Note: this was a simultaneous Buy/Write transaction
03/08/2018 Upcoming ex-dividend of $.18 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $12,967.63
= ($33.40 - $1.00)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$400.00
= ($1.00* 400 shares)
(b) Dividend Income: +$72.00
= $.18 per share * 400 shares 
(c) Capital Appreciation (If SBGI is above $33.00 strike price at Mar 16th expiration): -$164.95
= ($33.00 -$33.40)* 400 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$307.05
= (+$400.00 options income +$72.00 dividend income -$164.95 capital appreciation)

Absolute Return: +2.4%
= +$307.05/$12,967.63
Equivalent Annualized Return: +86.4%
= (+$307.05/$12,967.63)*(365/10 days)

The downside 'breakeven price' at expiration is at $32.22 ($33.40 - $1.00 - $.18), which is 3.5% below the current market price of $33.40.  This is substantial protection given the very high potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2018 options expiration) for this Sinclair Covered Calls position is 57.3%, so the expected value annualized ROI of this investment (if held until expiration) is +50.2% (+87.6% * 57.3%), a nice expected value result for this in-the-money Covered Calls position.   

Roll-Up of Lam Research Corp. Covered Calls

Today, the Covered Calls position in Lam Research Corp. was rolled up from the March 16th $160.00 strike price to the March 16th $180.00 strike price.  With an ex-dividend tomorrow of $.50 and the stock deep in-the-money, there was only $.05 time value remaining in the $160 strike price short Call options.  Therefore, there is a very high likelihood the stock would have been called away later today by the owner of the Calls to capture the dividend.

The Covered Calls Advisor decided to roll-up to the $180.00 strike price (with $1.90 time value remaining) to ensure that the dividend will be captured and that there is also a good possibility of also capturing the $1.90 per share time value as additional profit as long as Lam Research stock is above the $180.00 strike price on the Mar 16th expiration date.  If this occurs, the financial result would be a +3.94% absolute return in 32 days (equivalent to a +44.9% annualized return-on-investment) for this Lam Research Corp. position.  Details are provided below.


Lam Research Corp. (LRCX) -- Roll-Up Covered Calls Position

The transactions were as follows:
02/13/2018 Bought 200 shares of Lam Research stock @ $169.41 per share 
02/13/2018 Sold 2 Lam Research Mar 16th, 2017 $160.00 Call options @ $13.68 per share
Note: this was a simultaneous Buy/Write transaction
03/05/2018 Bought-to-Close 2 LRCX Mar 16th $160.00 Call options @ $33.00 per share
03/05/2018 Sold-to-Open 2 LRCX March 16th $180.00 Call options @ $14.60 per share
Note: this was a simultaneous Call spread transaction
03/06/2018 Upcoming quarterly ex-dividend of $.50 per share

A possible overall performance result (including commissions) for this ongoing Lam Research Covered Calls position is as follows:
Stock Purchase Cost Basis: $31,150.95
= ($169.41 - $13.68) * 200 shares +$4.95 commission

Net Profit:
(a) Options Income: -$985.54
= ($13.68 -$33.00 +$14.60) *200 shares - 3* $6.96 commissions
(b) Dividend Income: +$100.00
= ($.50 dividend per share x 200 shares)

(c) Capital Appreciation (If LRCX assigned at $180.00 strike price): +2,113.05
+($180.000 -$169.41)*200 shares - $4.95 commission

Total Net Profit (If LRCX assigned on March 16th, 2018 at $180.00 strike price): +$1,227.51

= (-$985.54 +$100.00 +$2,113.05)

Absolute Return (If LRCX assigned at $180.00 at March 16th, 2018 expiration): +3.94%

= +$1,227.51/$31,150.95

Annualized Return (If LRCX assigned at $180.00 at March 16, 2018 expiration): +44.9%

= (+$1,227.51/$31,150.95)*(365/32 days)

Early Assignment of Rio Tinto PLC Covered Calls Position

Before the market open today, the Covered Calls Advisor received notification from my broker (Schwab) that the 3 Rio Tinto PLC (ticker symbol RIO) April 20th, 2017 Call options were exercised early, so the 300 shares of Rio Tinto stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $50.00 strike price. 

Rio Tinto stock was $54.71 at yesterday's market close.  Early exercise by the owners of these Call options was expected since the Call options were in-the-money and there was only $.04 time value [$4.75 midpoint of Call options bid/ask price - ($54.71 current stock price - $50.00 strike price)] remaining in these Call options.  So, the Call owners were willing to immediately forego the remaining $0.04 per share (by exercising their option to buy the shares) in order to capture today's large $1.7955 per share ex-dividend.  The per share stock price had increased slightly from $54.04 when this Rio Tinto position was originally established on February 7th to $54.71 (9.4% in-the-money) at yesterday's market close.

Rio Tinto is a London-based diversified mining company operating mostly in Australia.  They had reported their annual earnings for 2017 just prior to the Covered Calls Advisor establishing this position.   Largely as a result of increased commodity prices, their financial results were stellar.  Revenues increased to $40 billion, operating cash flow was an impressive $13.9 billion and earnings increased 69% above last year to $8.63 billion.  Mr. Jacques has been the Chief Executive for only about 18 months now, but he is demonstrating a very shareholder friendly management style.  A company record $5.2 billion will be distributed to shareholders in 2018 and an additional $1.0 billion will be used for share buybacks.

Using the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (Link to 'Criteria for Identifying Dividend Capture Covered Calls Opportunities' blog article) has been working nicely recently.  In addition to this Rio Tinto position, recent early assignments in iShares China Large Cap ETF, Devon Energy, Best Buy, Schlumberger, Bank of America (2 positions), MGM Resorts, Kohl's, Intel, JPMorgan Chase, PulteGroup, and Goldman Sachs Covered Calls positions have achieved annualized return-on-investment results of +19.1%, +22.7%, +41.1%, +33.5%, +19.3%, +33.0%, +27.1%, +37.0%, +53.2%, +16.1%, +15.6%, and +19.8% respectively. 

As detailed below, the actual return-on-investment result achieved for this Rio Tinto position was a +0.9% absolute return (equivalent to +15.5% annualized return) for the 22 days this position was held.  The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls position is established, the transactions details of which will be posted on this blog site the same day they occur.


Rio Tinto PLC (RIO) -- New Covered Calls Position

The transactions were:
02/07/2018 Bought 300 Rio Tinto shares @ $54.04
02/07/2018 Sold 3 Rio Tinto 04/20/2018 $50.00 Call options @ $4.52
Note: a simultaneous buy/write transaction was executed.
02/28/2018 Three RIO Call options exercised early (day prior to ex-dividend date); so stock assigned (sold) at $50.00 strike price.

The overall performance results (including commissions) for this Rio Tinto Covered Calls position was as follows:
Covered Calls Cost Basis: $14,862.96
= ($54.04 - $4.52) *300 + $6.96 commission

Net Profit Components:
(a) Options Income: +$1,356.00
= ($4.52*300 shares)
(b) Dividend Income (Option exercised early on Feb 28th, the business day prior to Mar 1st ex-div date): +$0.00

(c) Capital Appreciation (RIO assigned early on Feb 28th): -$1,216.95
+($50.00-$54.04)*300 shares - $4.95 commissions

Total Net Profit: +$139.05

= (+$1,356.00 +$0.00 -$1,216.95)

Absolute Return: +0.9%

= +$139.05/$14,862.96

Annualized Return: +15.5%

= (+$139.05/$14,862.96)*(365/22 days)

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Godspeed,
Jeff