Today, the Covered Calls Advisor established new positions in Apple Inc. (ticker AAPL), EMC Corporation (EMC), General Motors Co. (GM), Prudential Financial Inc. (PRU), and United Continental Holdings Inc. (UAL) by selling Oct2015 options. All positions are somewhat conservative ones in that they have significant downside protection and none of the companies report their quarterly earnings prior to the options expiration date; but as detailed below, each investment also provides an attractive annualized return-on-investment potential. The first three positions listed above are Covered Calls and the last two are short 100% cash-secured Put options.
The potential returns are:
1. Apple Inc.: +1.9% absolute
return in 25 days (which is equivalent to a +27.3% annualized
return-on-investment) if AAPL closes above the $110.00 strike price on the Oct2015 options expiration date.
2. EMC Corp: +1.8% absolute
return in 25 days (equivalent to a +26.6% annualized
return-on-investment)
3. General Motors Co.: +2.0% absolute
return in 25 days (equivalent to a +28.7% annualized
return-on-investment)
4. Prudential Financial: +2.5% absolute
return in 25 days (equivalent to a +36.9% annualized
return-on-investment)
5. United Continental: +2.2% absolute
return in 25 days (equivalent to a +32.1% annualized
return-on-investment)
Note: the Implied Volatility of the options at the time they were sold (for the five options above) ranged between 27 and 35.5, thus providing an attractive ROI return potential for 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:
09/22/2015 Bought 200 Apple Inc. shares @ $113.58
09/22/2015 Sold 2 AAPL Oct2015 $110.00 Call options @ $5.80
Note: the price of AAPL was $113.71 today when this options transaction was executed.
A possible overall performance result (including commissions) would be as follows:
Bought 200 shares AAPL: $22,724.95
= $113.58*200 + $8.95 commission
Net Profit:
(a) Options Income: +$1,149.55
= ($5.80*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL is above $110.00 strike price at Oct2015 expiration): -$724.95
= ($110.00-$113.58)*200 shares - $8.95 commissions
Total Net Profit (If AAPL is above $110.00 strike price at Oct2015 options expiration): +$424.60
= (+$1,149.55 options income +$0.00 dividends -$724.95 capital appreciation)
Absolute Return (If AAPL is above $110.00 strike price at Oct2015 options expiration): +1.9%
= +$424.60/$22,724.95
Annualized Return: +27.3%
= (+$424.60/$22,724.95)*(365/25 days)
The downside 'breakeven price' at expiration is at $107.78 ($113.58 - $5.80), which is 5.1% below the current market price of $113.58.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Oct 16th, 2015 options expiration) for
this Apple Inc. covered calls position is 66%. 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 66%,
the Expected Value annualized
ROI of this investment (if held until expiration) is +18.0% (+27.3% *
66%).
The 'crossover price' at expiration is $115.80 ($110.00 + $5.80). This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until Oct 16th (the Oct2015 options expiration date) rather than establishing this covered calls position.
2. EMC Corporation (EMC) -- New Covered Calls Position
A $.115 quarterly dividend goes ex-dividend on September 29th. Although
unlikely, if the current time value (i.e. extrinsic value) of $.37
[$1.08 option premium - ($23.71 stock price - $23.00 strike price)]
remaining in the short call options decay substantially below the $.115
dividend amount by September 28th (the 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.
The transactions were as follows:
09/22/2015 Bought 400 EMC Corp shares @ $23.71
09/22/2015 Sold 4 EMC Oct2015 $23.00 Call options @ $1.08
Note: the stock purchase and the sale of these call options was done as one simultaneous buy/write transaction.
Two possible overall performance results (including commissions) for
this EMC Corp (EMC) covered calls position are as follows:
Stock Purchase Cost: $9,492.95
= ($23.71*400+$8.95 commission)
Net Profit:
(a) Options Income: +$420.05
= ($1.08*400 shares) - $11.95 commissions
(b) Dividend Income (If option exercised early on day prior to Sep 29th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$46.00
= ($.115 dividend per share x 400 shares); or
(c) Capital Appreciation (If stock assigned early on Sept 28th): -$292.95
+($23.00-$23.71)*400 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $23.00 at Oct2015 expiration): -$292.95
+($23.00-$23.71)*400 - $8.95 commissions
Total Net Profit (If option exercised on day prior to Sept 29th ex-div date): +$127.10
= (+$420.05 options income +$0.00 dividend income -$292.95 capital appreciation); or
Total Net Profit (If stock assigned at $42.00 at Oct2015 expiration): +$173.10
= (+$420.05 options income +$46.00 dividend income -$292.95 capital appreciation)
1. Absolute Return (If option exercised on day prior to ex-div date): +1.3%
= +$127.10/$9,492.95
Annualized Return (If option exercised early): +69.8%
= (+$127.10/$9,492.95)*(365/7 days); OR
2. Absolute Return (If EMC stock assigned at $23.00 at Oct2015 expiration): +1.8%
= +$173.10/$9,492.95
Annualized Return (If EMC stock assigned): +26.6%
= (+$173.10/$9,492.95)*(365/25 days)
As
is often the case, early assignment provides a higher annualized
return, so this is the Covered Calls Advisor's preferred outcome; but
either outcome would provide a very good return. These returns will be
achieved as long as the stock is above the $23.00 strike price on the options expiration date. Note: there is 3.0% of downside protection to the strike price with this position. Alternatively, if the
stock declines below the strike price, the breakeven price of $22.63
($23.71 -$1.08) provides a nice 4.6% downside protection.
3. General Motors Co. (GM) -- New Covered Calls Position
The transactions were as follows:
09/22/2015 Bought 300 General Motors Co. shares @ $29.67
09/22/2015 Sold 3 GM Oct2015 $29.00 Call options @ $1.32
Note: the stock purchase and the sale of these call options was done as one simultaneous buy/write transaction.
A possible overall performance result (including commissions) would be as follows:
Bought 300 shares GM: $8,909.95
= $29.67*300 + $8.95 commission
Net Profit:
(a) Options Income: +$384.80
= ($1.32*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GM is above $29.00 strike price at Oct2015 expiration): -$209.95
= ($29.00-$29.67)*300 shares - $8.95 commissions
Total Net Profit (If GM is above $29.00 strike price at Oct2015 options expiration): +$174.85
= (+$384.80 options income +$0.00 dividend income -$209.95 capital appreciation)
Absolute Return (If GM is above $29.00 strike price at Oct2015 options expiration): +2.0%
= +$174.85/$8,909.95
Annualized Return (If GM stock is above $29.00 at expiration): +28.7%
= (+$174.85/$8,909.95)*(365/25 days)
The downside 'breakeven price' at expiration is at $28.35 ($29.67-$1.32), which is 4.4% below the current market price of $29.67.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Oct 16th, 2015 options expiration) for
this GM position is 59%. This compares with a
probability of
profit of 50.2% for a buy-and-hold of General Motors 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 +16.9% (+28.7% *
59%).
The 'crossover price' at expiration is $24.32 ($23.00 + $1.32). This is the price above which it would have been more profitable to simply buy-and-hold GM stock until October 16th (the Oct2015 options expiration date) rather than establishing this covered calls position.
4. Prudential Financial Inc. (PRU) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
09/22/2015 Sold 2 PRU Oct2015 $75.00 100% cash-secured Put options @ $1.95
Note: the price of PRU was $75.60 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: $15,000.00
= $75.00*200
Note: the price of PRU was $75.60 when these options were sold
Net Profit:
(a) Options Income: +$379.55
= ($1.95*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PRU is above $75.00 strike price at Oct2015 expiration): +$0.00
= ($75.00-$75.00)*200 shares
Total Net Profit (If PRU is above $75.00 strike price at Oct2015 options expiration): +$379.55
= (+$379.55 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If PRU is above $75.00 strike price at Oct2015 options expiration): +2.5%
= +$379.55/$15,000.00
Annualized Return: +36.9%
= (+$379.55/$15,000.00)*(365/25 days)
The
downside 'breakeven price' at expiration is at $73.05 ($75.00 - $1.95),
which is 2.6% below the current market price of $75.60.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Oct 16th, 2015 options expiration) for
this Prudential Financial short Puts position is 56%. This compares with a
probability of
profit of 50.3% for a buy-and-hold of Prudential stock over the same
time period.
Using this probability of profit of 56%,
the Expected Value annualized
ROI of this investment (if held until expiration) is +20.7% (+36.9% *
56).
The
'crossover price' at expiration is $77.55 ($75.60 + $1.95). This is the
price above which it would have been more profitable to simply
buy-and-hold PRU until Oct 16th (the Oct2015 options expiration date)
rather than selling these Put options.
5. United Continental Holdings Inc. (UAL) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
09/22/2015 Sold 3 UAL Oct2015 $57.50 100% cash-secured Put options @ $1.30
Note: the price of UAL was $59.56 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
Net Profit:
(a) Options Income: +$378.80
= ($1.30*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UAL is above $57.50 strike price at Oct2015 expiration): +$0.00
= ($57.50-$57.50)*300 shares
Total Net Profit (If UAL is above $57.50 strike price at Oct2015 options expiration): +$378.80
= (+$378.80 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If UAL is above $57.50 strike price at Oct2015 options expiration): +2.2%
= +$378.80/$17,250.00
Annualized Return: +32.1%
= (+$378.80/$17,250.00)*(365/25 days)
The
downside 'breakeven price' at expiration is at $56.20 ($57.50 - $1.30),
which is 2.2% below the current market price of $59.56.
Using the Black-Scholes Options Pricing Model in the Schwab
Hypothetical Options Pricing Calculator, the probability of
making a profit (if held until the Oct 16th, 2015 options expiration) for
this UAL short Puts position is 67%. This compares with a
probability of
profit of 50.1% for a buy-and-hold of United Continental stock over the same
time period.
Using this probability of profit of 67%,
the Expected Value annualized
ROI of this investment (if held until expiration) is +21.5% (+32.1% *
67%).
The
'crossover price' at expiration is $60.86 ($59.56 + $1.30). This is the
price above which it would have been more profitable to simply
buy-and-hold UAL until Oct 16th (the Oct2015 options expiration date)
rather than selling these Put options.
