Thursday, January 19, 2017

Overall Market Meter Remains "Slightly Bearish"

Today, the Covered Calls Advisor recalculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The result is that the Covered Calls Advisor's current market viewpoint remains at Slightly Bearish.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.    

The seven factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).
Note: The rating for each of these factors is not subjective.  Each factor is calculated using objective, quantifiable measures.


















The current Market Meter average of 3.00 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 2.35 to 3.09). 

Both of the value-related factors are now Very Bearish.  The current P/E ratio for the S&P 500 (based on the average of the Operating and As Reported earnings for the past year) is very high at 23.9.  This is much higher than the expected current P/E ratio of 18.6 (based on the current 2.1% CPI-U inflation rate for the past year).  The market would have to decline by 22.2% from its current level to reach a P/E ratio of 18.6.  Despite the fact that most other factors are Bullish, these two Very Bearish value factors (i.e. P/E Ratio and the Total Market to GDP Ratio) coupled with an expectation of modest sales and earnings growth over the next year explains why the Covered Calls Advisor Portfolio is currently 25% invested and 75% in cash at this time.  

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bearish sentiment is to "on-average sell 1% in-the-money covered calls for the next options expiration month".

Your comments or questions regarding this post (or the details related to any of the seven factors used in this model) are welcomed. Please email me at the address shown in the upper-right sidebar.

Regards and Godspeed,
Jeff

Wednesday, January 18, 2017

Established Positions in Citigroup Inc. and Hawaiian Holdings Inc.

Two positions have been established in Citigroup Inc.(ticker symbol C) and Hawaiian Holdings Inc.(ticker HA).  Citigroup Inc. is a covered calls position with a Feb2017 expiration at the $60.00 strike price that includes the expected upcoming quarterly ex-dividend of $.16 around Jan 30th.  For Hawaiian Holdings Inc., five February 2017 100% cash-secured Put options were sold at the $50 strike price.  The short Puts were chosen instead of covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, some potential returns are:
1. Citigroup Inc.: +1.4% absolute return in 31 days (equivalent to a +16.9% annualized return-on-investment) if the price of Citigroup is unchanged at expiration.  If the stock increases above the strike price at expiration, there would be a +5.8% absolute return and a +68.5% annualized roi.
2. Hawaiian Holdings Inc.: +1.4% absolute return in 32 days (equivalent to a +15.4% annualized return-on-investment)

The details for each position are provided below.

1. Citigroup Inc. (C) -- New Covered Calls Position

The transactions were as follows:
01/18/2017 Bought 500 Citi shares @ $57.48
01/18/2017 Sold 5 Citi Feb2017 $60.00 Call options @ $.63
Note: a simultaneous buy/write transaction was executed.
01/30/2017 Estimated upcoming ex-dividend of $.16 per share

Two possible overall performance results (including commissions) for this Citi covered calls position are as follows:
Stock Purchase Cost: $28,747.95
= ($57.48*500+$7.95 commission)

Net Profit:
(a) Options Income: +$340.80
= ($.63*500 shares) - $11.70 commissions
(b) Dividend Income: +$80.00
= ($.16 dividend per share x 500 shares)
(c) Capital Appreciation (If price of Citi stock is unchanged at $57.48 upon Feb2017 options expiration date): -$7.95
=+($57.48-$57.48)*500 - $7.95 commissions; or
(c) Capital Appreciation (If price of Citi stock rises to above $60.00 strike price at Feb2017 options expiration date): +$1,252.05
=+($60.00-$57.48)*500 - $7.95 commissions

Total Net Profit (If Citi stock price unchanged at Feb2017 expiration): +$412.85
= (+$340.80 options income +$80.00 dividend income -$7.95 capital appreciation); or
Total Net Profit (If Citi stock assigned at $60.00 at Feb2017 expiration): +$1,672.85
= (+$340.80 +$80.00 +$1,252.05)

1. Absolute Return (If Citi stock price unchanged at expiration): +1.4%
= +$412.85/$28,747.95
Annualized Return: +16.9%
= (+$412.85/$28,747.95)*(365/31 days); OR

2. Absolute Return (If Citi assigned at $60.00 at Feb2017 expiration): +5.8%
= +$1,672.85/$28,747.95
Annualized Return: +68.5%
= (+$1,672.85/$28,747.95)*(365/31 days)



2. Hawaiian Holdings Inc. (HA) -- New 100% Cash-Secured Puts Position

Yesterday, the Covered Calls Advisor established a new position in Hawaiian Holdings Inc. (ticker symbol HA) by selling five Feb2017 Put options at the $50.00 strike price. This position is a very conservative one since it was established when the price of Hawaiian Air was $56.50 (11.5% downside protection to the strike price) and 32 days remaining until the options expiration date.

The implied volatility of the Put options was 41.6 when this position was established; so the $.70 price received per share received when the Puts were sold is a nice premium to receive for these 11.5% out-of-the-money Put options.    

The transaction was as follows:01/17/2017  Sold 5 HA Feb2017 $50.00 100% cash-secured Put options @ $.70
Note: the price of HAL was $56.50 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: $24,992.05
= $50.00*500 - $7.95 commission
Note: the price of HA was $56.50 when these options were sold

Net Profit:
(a) Options Income: +$338.30
= ($.70*500 shares) - $11.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HA is above $50.00 strike price at Feb2017 expiration): +$0.00
= ($55.00-$55.00)*500 shares

Total Net Profit (If Hawaiian Holdings stock price is above $50.00 strike price at Feb2017 options expiration): +$338.30
= (+$338.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If HA is above $50.00 strike price at Feb2017 options expiration): +1.4%
= +$338.30/$24,992.05
Annualized Return: +15.4%
= (+$338.30/$24,992.05)*(365/32 days)

The downside 'breakeven price' at expiration is at $449.30 ($50.00 - $.70), which is 12.7% below the current market price of $56.50.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Feb 17th, 2017 options expiration) for this Hawaiian Holdings short Puts position is 84.4%. This compares with a probability of profit of 50.3% for a buy-and-hold of HA shares over the same time period. Using this probability of profit of 84.4%, the expected value annualized return-on-investment (if held until expiration) is +13.0% (+15.4% * 84.4%), an attractive risk/reward profile for this very conservative investment.  

The 'crossover price' at expiration is $57.20 ($56.50 + $.70).  This is the price above which it would have been more profitable to simply buy-and-hold HA stock until the Feb2017 options expiration date rather than selling these Put options.

Thursday, January 12, 2017

Established New Position in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor established a new position in Alibaba Group Holding Ltd. (ticker symbol BABA) by selling four Feb2017 Put options at the $92.50 strike price. This position is a conservative one since it was established when the price of Alibaba was $95.38 (3.0% downside protection to the strike price) and 37 days remaining until the options expiration date.

As detailed below, the Alibaba Group Holding Ltd. investment will yield a +2.6% absolute return in 37 days (which is equivalent to a +25.9% annualized return-on-investment) if Alibaba stock closes above the $92.50 strike price on the Feb 17th options expiration date. 

The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the four Put options sold.

The implied volatility of the Put options was 31.3 when this position was established; so the $2.46 price per share received when the Puts were sold is a nice premium to receive for these 3% out-of-the-money Put options.     

1. Alibaba Group Holding Ltd (BABA) --
The transaction was as follows:
01/12/2017  Sold 4 BABA 100% cash-secured $92.50 Put options with Feb2017 expirations @ $2.46
Note: the price of Alibaba was $95.38 today when this transaction was executed.

A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $37,000.00
= $92.50*400 shares

Net Profit:
(a) Options Income: +$973.05
= ($2.46 * 400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA closes above $92.50 strike price at Feb2017 expiration): +$0.00
= ($92.50 -$92.50)*400 shares

Total Net Profit: +$973.05
= (+$973.05 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.6%
= +$973.05/$37,000.00
Annualized Return: +25.9%
= (+$973.05/$37,000.00)*(365/37 days)

The downside 'breakeven price' at expiration is at $90.04 ($92.50 - $2.46), which is 5.6% below the current market price of $95.38.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Feb 17th, 2017 options expiration) for this Alibaba short Puts position is 64%. This compares with a probability of profit of 50.3% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 64%, the expected value annualized return-on-investment (if held until expiration) is +16.6% (+25.9% maximum potential annualized return on investment * 64%), an attractive risk/reward profile for this investment.  

The 'crossover price' at expiration is $97.84 ($95.38 + $2.46).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Feb2017 options expiration date rather than selling these Put options.

Sold a 100% Cash-Secured Put Option in Amazon.com Inc.

Today, the Covered Calls Advisor established a 100% Cash-Secured Put position in Amazon.com Inc.(Ticker Symbol AMZN) with a Feb2017 expiration and at the $770.00 strike price.  As detailed below, this investment will provide a +2.3% absolute return in 37 days (which is equivalent to a +22.3% annualized return) if Amazon.com stock closes at or above $770.00 at options expiration on Feb 17th.  This potential result exceeds the Covered Calls Advisor's desired threshold of >20% potential annualized return-on-investment.  

Given the Covered Calls Advisor's current 'Slightly Bearish' overall market outlook, one out-of-the-money Put option was sold with the strike price of $770.00 (which is 4.2% below the stock price of $813.49) at the time this Put option was sold.

Details of this transaction along with a potential return-on-investment result are: 

Amazon.com Inc. (AMZN)
The transaction is as follows:
01/12/2017 Sold 1 Feb2017 $770.00 Put @ $17.50
Note: The price of Amazon.com stock was $803.49 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the Put option sold.

A possible overall performance result (including commissions) for this Amazon.com transaction would be as follows:
100% Cash-Secured Cost Basis: $77,000.00 = $770.00 * 100 shares

Net Profit:
(a) Options Income: +$1,741.30

= ($17.50*100 shares) - $8.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AMZN closes above $770.00 at Feb2017 expiration): +$0.00
= ($770.00-$770.00)*100 shares

Total Net Profit (If AMZN is above $770.00 strike price at Feb2017 options expiration):+$1,741.30 
= (+$1,741.30 option income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If AMZN is above $770.00 at Feb2017 options expiration and Put option thus expires worthless): +2.3%
= +$1,741.30/$75,000.00
Annualized Return: +22.3%
= (+$1,741.30/$75,000.00)*(365/37 days)

The downside 'breakeven price' at expiration is at $752.50 ($770.00 - $17.50), which is 6.3% below the current market price of $803.49.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Feb 17th, 2017 options expiration) for this Amazon.com short Put position is 68.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Amazon.com stock over the same time period. Using this probability of profit of 68.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +15.3% (+22.3% * 68.5%).
 
The 'crossover price' at expiration is $820.99 ($803.49 + $17.50).  This is the price above which it would have been more profitable to simply buy-and-hold Amazon.com stock until Feb 17th (the Feb2017 options expiration date) rather than selling this short Put option.