Established Covered Calls Position in PulteGroup Inc.

Today, a Covered Calls position was established in PulteGroup Inc.(ticker symbol PHM) with an April 20th, 2018 expiration at the $28.00 strike price. The stock was purchased at $29.19 and the Call options sold at $1.71 per share.  Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a moderately in-the-money position was established.

The Implied Volatility of these Call options was 27.9 when this position was established.  This is noticeably higher than the average Historic Volatility for Pulte during non-earnings months during the past year, especially since there is no quarterly earnings report prior to  the April 20th expiration.

Pulte appeared on this Advisor's 'Multifactor' screen, which was developed from a combination of several valuation, profitability, capital allocation, and growth factors identified from the research results contained in Richard Tortoriello's book "Quantitative Strategies for Achieving Alpha".  At the present time for consumer oriented companies, the Covered Calls Advisor prefers companies expected to increase earnings substantially this year and that will benefit significantly from the corporate tax rate reduction recently passed into law.  Pulte certainly qualifies in this regard since their 2017 tax rate was 52.4% and they are currently expected to increase earnings by approximately +42% this year.

As detailed below, a potential outcome is +1.8% absolute return in 33 days (equivalent to a +19.4% annualized return-on-investment) if the price of Pulte remains above the strike price at expiration.


The details for this position are:

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

The transactions were as follows:
03/19/2018 Bought 600 Pulte shares @ $29.19
03/19/2018 Sold 6 Pulte Apr 20, 2018 $28.00 Call options @ $1.71
Note: a simultaneous buy/write transaction was executed.

A possible overall performance result (including commissions) for this Pulte Covered Calls position is as follows:
Stock Purchase Cost: $17,522.97
= ($29.19 - $1.71) *600 shares +$8.97 commission

Net Profit Components:
(a) Options Income: +$1,026.00
= ($1.71*600 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If stock assigned at Apr 20, 2018 options expiration): -$718.95
=+($28.00-$29.19)*600 - $4.95 commissions

Total Net Profit (If Pulte stock assigned at $28.00 at April 20th expiration): +$307.05

= (+$1,026.00 +$0.00 -$718.95)

Absolute Return (If Pulte assigned at $28.00 on April 20th options expiration date): +1.8%

= +$307.05/$17,522.97

Annualized Return: +19.4%

= (+$307.05/$17,522.97)*(365/33 days)

The downside 'breakeven price' at expiration is at $27.48 ($29.19 - $1.71), which is 5.9% below the current market price of $29.19.  This is substantial downside protection given the potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the April 20th, 2018 options expiration) for this PulteGroup Covered Calls position is 69.1%, so the expected value annualized ROI of this investment (if held until expiration) is +13.4% (+19.4% * 69.1%), a satisfactory expected value result for this moderately in-the-money Covered Calls position.   

March 16th 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had twelve positions with March 16th 2018 options expirations:

• Eight positions [Alibaba Group Holding Ltd. (2 positions), Bank of America Corp., Caterpillar Inc., Intel Corporation, Lam Research Corp., Marathon Petroleum Corp., and Synchrony Financial] closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions.
• Three positions (Blackstone Group LP, Delta Air Lines Inc., and Sinclair Broadcast Group Inc.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see current holdings in right sidebar) until either the stock is sold or continuation Covered Calls positions are established.  
• One position in Rio Tinto PLC had an early assignment (on the day prior to the ex-dividend date) and the +15.5% annualized return-on-investment result from this position was posted on this blog site on March 1st (the same day it occurred).

So nine of the twelve positions (75%) were assigned and thus achieved the maximum return-on-investment results.  This result exceeds the Covered Calls Advisor's overall long-term goal of having at least 67% of positions assigned at a profit.  So far in 2018, eighteen of twenty-one positions (85.7%) were assigned profitably and the remaining three positions are the Blackstone, Delta, and Sinclair positions from yesterday's close that currently remain as open positions.   

For the eight positions assigned at yesterday's March 16th expiration, the average annualized return-on-investment was +28.0%.  The results for each position was:

• Alibaba Group Holding Ltd. (Position #1):  +2.9%% absolute return (+24.4% annualized return) in 43 days
• Alibaba Group Holding Ltd. (Position #2):  +3.4%% absolute return (+32.2% annualized return) in 39 days 
• Bank of America Corp.:  +2.3% absolute return (+22.2% annualized return) in 38 days
• Caterpillar Inc.:  +4.4% absolute return (+34.4% annualized return) in 47 days
• Intel Corp.:  +1.0% absolute return (+7.6% annualized return) in 46 days  
• Lam Research Corp.:  +3.9% absolute return (+44.9% annualized return) in 32 days
• Marathon Petroleum Corp.:  +3.6% absolute return (+29.5% annualized return) in 45 days
• Synchrony Financial:  +2.9% absolute return (+29.0% annualized return) in 36 days

The cash now available in the Covered Calls Advisor Portfolio from the closing of these eight positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

To demonstrate how return-on-investment results for a closed Covered Calls position are calculated, the details for one of the eight assigned positions is provided here:

Alibaba Group Holding Ltd. (BABA Position #1) -- Covered Calls Position Closed

The transactions were as follows:
02/02/2018 Bought 300 shares of Alibaba stock @ $187.30 per share 
02/02/2018 Sold 3 Alibaba March 16th, 2018 $180.00 Call options @ $12.35 per share
Note: this was a simultaneous Buy/Write transaction
03/16/2018 3 BABA Mar 16th, 2018 $180.00 Call options expired in-the-money, so 300 shares of BABA owned were sold at the $180.00 strike price, thus closing out this Covered Calls position.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $52,554.60
= ($187.30 - $12.35)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$3,705.00
= ($12.35* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $180.00 strike price at March 16th expiration): -$2,194.95
= ($180.00 -$187.30)* 300 shares - $4.95 commission

Total Net Profit: +$1,510.05
= (+$3,705.00 options income +$0.00 dividend income -$2,194.95 capital appreciation)

Absolute Return: +2.9%
= +$1,510.05/$52,554.60
Equivalent Annualized Return: +24.4%
= (+$1,510.05/$52,554.60)*(365/43 days)

Established Covered Calls Position in Alibaba Group Holding Ltd.

A new Covered Calls positions was established in Alibaba Group Holding Ltd. with an April 20th, 2018 options expiration date and at the $185.00 strike price when Alibaba was priced at $189.78. 

The Covered Calls Advisor considers Alibaba to be a core portfolio holding, so the current intention is to continue the pattern of prior months by establishing ongoing monthly Covered Calls positions in Alibaba.  With the March 16th expiration rapidly approaching and both current Alibaba Mar16th $180.00 Covered Calls likely to be assigned at expiration (an optimal result given that this outcome provides the maximum possible return-on-investment for these positions), an April position was established to ensure an ongoing Covered Calls position in Alibaba.  Alibaba's forecast is that revenue growth of about 55% will continue this quarter, in which case the trailing twelve months P/E ratio based on today's price would likely be about 37, high for most companies, but a good value given their ongoing growth potential.

As detailed below, a potential return-on-investment result is +3.0% absolute return in 39 days (equivalent to a +28.2% annualized return-on-investment).
The transactions and a potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position

The transactions were as follows:
03/13/2018 Bought 200 shares of Alibaba stock @ $189.78 per share 
03/13/2018 Sold 2 Alibaba April 20th, 2018 $185.00 Call options @ $10.22 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $35,918.29
= ($189.78 - $10.22)* 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$2,044.00
= ($10.22* 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $185.00 strike price at April 20th expiration): -$960.95
= ($185.00 -$189.78)* 200 shares - $4.95 commission

Total Net Profit: +$1,083.05
= (+$2,044.00 options income +$0.00 dividend income -$960.95 capital appreciation)

Absolute Return: +3.0%
= +$1,083.05/$35,918.29
Equivalent Annualized Return: +28.2%
= (+$1,083.05/$35,918.29)*(365/39 days)

The downside 'breakeven price' at expiration is at $179.56 ($189.78 - $10.22), which is 5.4% below the current market price of $189.78.
A recent quantitative study titled "Which Index Options Should You Sell" provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options in the range of -0.5 to -0.6 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Alibaba position, the $185.00 April 20th, 2018 monthly option was selected since its breakeven price is -0.5 standard deviations from the current price of $189.78.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the April 20th, 2018 options expiration) for this Alibaba Covered Calls position is 62.8%, so the expected value annualized ROI of this investment (if held until expiration) is +17.7% (+28.2% * 62.8%), a nice result for this moderately in-the-money Covered Calls position, especially since there is no earnings report prior to the options expiration date.

The 'crossover price' at expiration is $195.22 = $189.78 + [$10.22 - ($189.78 - $185.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the April 20th, 2018 options expiration date rather than establishing this Covered Calls position.

Roll-Up-and-Out United States Steel Corp. Covered Calls

Today, the Covered Calls position in United States Steel Corp. was rolled-up-and-out from the March 16th $36.00 strike price to the April 20th $40.00 strike price. A simultaneous net debit Call spread was executed at $2.45 when the price of U.S. Steel stock was $41.88. 

As detailed below, if the stock remains above the $40.00 strike price at market close on the April 20th options expiration date, the result would be a +10.3% absolute return in 79 days (equivalent to a +47.4% annualized return-on-investment) for this US Steel position.  

United States Steel Corp. (X) -- New Covered Calls Position

The transactions were:
02/01/2018 Bought 400 shares of U.S. Steel stock @ $36.72 per share 
02/01/2018 Sold 4 U.S. Steel Mar 16th, 2018 $36.00 Call options @ $2.62 per share
Note: this was a simultaneous Buy/Write transaction
02/08/2018 $20.00 = ($.05 per share ex-dividend x 400 shares)
03/13/2018 Bought-to-Close 4 Mar 16th $36.00 Call options @ $5.99
03/13/2018 Sold-to-Open 4 Apr 20th $40.00 Call options @ $3.57
Note: this Calls debit spread transaction occurred when the stock was at $41.88

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $13,647.63
= ($36.72 - $2.62)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$71.97
= ($2.62 - $5.99 + $3.57) * 400 shares - $8.03 commissions 
(b) Dividend Income: +$20.00
= $.05 per share * 400 shares 
(c) Capital Appreciation (If X is above $40.00 strike price at Apr 20th expiration): +$1,307.05
= ($40.00 -$36.72)* 400 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$1,399.02
= (+$71.97 options income +$20.00 dividend income +$1,307.05 capital appreciation)

Absolute Return: +10.3%
= +$1,399.02/$13,647.63
Equivalent Annualized Return: +47.4%
= (+$1,399.02/$13,647.63)*(365/79 days)