Friday, May 26, 2017

Established Covered Calls Position in General Motors Co.

Yesterday, a new covered calls positions were established in General Motors Co. (ticker symbol GM) with a Jun2017 options expiration.  This position has an upcoming quarterly ex-dividends on June 7th, so the potential return for this position includes the possibility of early exercise since the ex-dividend date is prior to the June 16th options expiration date.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, in-the-money covered calls were established. 

As detailed below, potential return-on-investment results for this GM position are: 
  • If Early Assignment: +1.2% absolute return (equivalent to +36.0% annualized return for the next 12 days) if the stock is assigned early (business day prior to June 7th ex-date); OR
  • If Dividend Capture: +2.4% absolute return (equivalent to +37.5% annualized return over the next 23 days) if the stock is assigned at the Jun2017 expiration on June 16th.



General Motors Co. (GM) -- New Covered Calls Position
The $.38 dividend of June 7th is included in the potential results detailed below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.40 [$1.10 option premium - ($32.20 stock price - $31.50 strike price)] remaining in the short call option decays to about $.10 or less by June 6th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the General Motors shares away to capture the dividend.

The transactions were:
05/25/2017 Bought 400 GM shares @ $32.20
05/25/2017 Sold 4 GM Jun2017 $31.50 Call options @ $1.10
Note: a simultaneous buy/write transaction was executed.
06/07/2017 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this General Motors covered calls position are as follows:
Stock Purchase Cost: $12,884.95
= ($32.20*400+$4.95 commission)

Net Profit:
(a) Options Income: +$437.40
= ($1.10*400 shares) - $2.60 commissions
(b) Dividend Income (If option exercised early on business day prior to June 7th ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at Jun2017 expiration): +$152.00
= ($.38 dividend per share x 400 shares)
(c) Capital Appreciation (If GM assigned early on June 6th): -$284.95
+($31.50-$32.20)*400 - $4.95 commissions; or
(c) Capital Appreciation (If GM assigned at $31.50 at Jun2017 expiration): -$284.95
+($31.50-$32.20)*400 - $4.95 commissions

Total Net Profit (If option exercised on day prior to June 7th ex-dividend date): +$152.45
= (+$437.40 options income +$0.00 dividend income -$284.95 capital appreciation); or
Total Net Profit (If GM assigned at $31.50 at Jun2017 expiration): +$304.45
= (+$437.40 options income +$152.00 dividend income -$284.95 capital appreciation)

1. Absolute Return [If option exercised on June 6th (business day prior to ex-dividend date)]: +1.2%
= +$152.45/$12,884.95
Annualized Return (If option exercised early): +36.0%
= (+$152.45/$12,884.95)*(365/12 days); OR

2. Absolute Return (If GM assigned at $31.50 at Jun2017 expiration): +2.4%
= +$304.45/$12,884.95
Annualized Return: +37.5%
= (+$304.45/$12,884.95)*(365/23 days)

In this instance, assignment at Mar2017 options expiration provides a slightly higher annualized return, so that outcome is preferable -- but either outcome would provide a very attractive return-on-investment result.  These returns will be achieved as long as the stock is above the $31.50 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $30.72 ($32.20 -$.38 -$1.10) provides 4.6% downside protection below today's purchase price.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the June 16th, 2017 options expiration) for this GM position is 66.8%. This compares with a probability of profit of 50.2% for a buy-and-hold of this GM stock over the same time period. Using this probability of profit of 66.8%, the expected value annualized return-on-investment (if held until expiration) is +25.1% (+37.5% maximum potential annualized return on investment * 66.8%), a very attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $32.92 ($32.20 - $.38 + $1.10).  This is the price above which it would have been more profitable to simply buy-and-hold GM stock until the Jun2017 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 General Motors position, ten of eleven criteria were achieved.

Thursday, May 25, 2017

Established Covered Calls Position in Devon Energy Corp.

Yesterday, a covered calls position was established in Devon Energy Corp. (ticker symbol DVN) with a Jun2017 expiration.  This covered calls position includes consideration of the upcoming $.06 quarterly dividend on June 13th. Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered calls position was established with the strike price of $36.00 (below the stock purchase price of $37.45).

As detailed below, a potential return is +1.8% absolute return in 24 days (equivalent to a +27.8% annualized return-on-investment) which is above the Covered Calls Advisor's minimum desired return-on-investment of 20.0%.

Devon Energy Corp. (DVN) -- New Covered Calls Position
The transactions were as follows:
05/25/2017  Bought 500 Devon Energy Corp. shares @ $37.45
05/25/2017 Sold 5 DVN Jun2017 $36.00 Call options @ $2.10
Note: this was a simultaneous buy/write transaction.
06/13/2017 Ex-dividend of $30.00 ($.06 x 500 shares)

A possible overall performance result (including commissions) would be as follows:
Bought 500 shares DVN: $18,729.95
= $37.45*500 + $4.95 commission

Net Profit:
(a) Options Income: +$1,041.80
= ($2.10*500 shares) - $8.20 commissions
(b) Dividend Income: +$30.00
= $.06 * 500 shares
(c) Capital Appreciation (If DVN is above $36.00 strike price at Jun2017 expiration): -$729.95
= ($36.00-$37.45)*500 shares - $4.95 commissions

Total Net Profit (If DVN stock is above $36.00 strike price at Jun2017 options expiration): +$341.85
= (+$1,041.80 options income +$30.00 dividends -$729.95 capital appreciation)

Absolute Return: +1.8%
= +$341.85/$18,729.95
Annualized Return: +27.8%
= (+$341.85/$18,729.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $35.29 ($37.45 - $.06 -$2.10), which is 5.8% below the current market price of $37.45.

Wednesday, May 24, 2017

Established New Position in Voya Financial Inc.

Today, a new position was established in Voya Financial Inc.(ticker VOYA) by selling five Jun 2017 100% cash-secured Put options at the $34.00 strike price.  The short Puts were chosen instead of the comparable covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

As detailed below, there is potential for a +1.6% absolute return in 24 days (equivalent to a +23.9% annualized return-on-investment).

Voya Financial Inc. (VOYA) -- New 100% Cash-Secured Puts Position
This position was established when the price of Voya Financial Inc. was $34.75 (2.2% downside protection to the strike price) and 24 days remaining until the options expiration date.

The implied volatility of the Put options was 23.6 when this position was established; so the $.55 price received per share received when the Puts were sold is a nice premium to receive for these out-of-the-money Put options.    

The transaction was as follows:
05/24/2017  Sold 5 VOYA Jun2017 $34.00 100% cash-secured Put options @ $.55
Note: the price of VOYA was $34.75 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 five Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $17,000.00
= $34.00*500

Net Profit:
(a) Options Income: +$266.80
= ($.55*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VOYA is above $34.00 strike price at Jun2017 expiration): +$0.00
= ($34.00-$34.00)*500 shares

Total Net Profit (If Voya Financial Inc. stock price is above $34.00 strike price at Jun2017 options expiration): +$266.80
= (+$266.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If VOYA is above $34.00 strike price at Jun2017 options expiration): +1.6%
= +$266.80/$17,000.00
Annualized Return: +23.9%
= (+$266.80/$17,000.00)*(365/24 days)

The downside 'breakeven price' at expiration is at $33.45 ($34.00 - $.55), which is 3.7% below the current market price of $34.75.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the June 16th, 2017 options expiration) for this Voya Financial Inc. short Puts position is 64.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of VOYA shares over the same time period. Using this probability of profit of 64.5%, the expected value annualized return-on-investment (if held until expiration) is +15.4% (+23.9% * 64.5%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $35.30 ($34.75 + $.55).  This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the June 16th, 2017 options expiration date rather than selling these Put options.

Tuesday, May 23, 2017

JPMorgan Chase and Co. Position Closed

The May2017 covered calls position in JPMorgan Chase and Co. (ticker JPM) expired upon last Friday's options expiration. Today, the Covered Calls Advisor decided to sell the 400 long shares of JPM.   As detailed below, the result of this JPMorgan Chase position was a +4.4% absolute return in 61 days (equivalent to a +26.1% annualized return-on-investment).  


JPMorgan Chase and Co. (JPM) - Position Closed
The transactions are as follows:
03/23/2017 Bought 400 JPM shares @ $87.21
03/23/2017 Sold 4 JPM Apr2017 $85.00 Call options @ $3.16
Note: a simultaneous buy/write transaction was executed.
04/04/2017 Quarterly ex-dividend of $.50 per share
04/21/2017 4 JPM Call options expired
04/24/2017 Sold 4 JPM May2017 $85.00 Call options @ $2.50
Note: the price of JPM was $86.53 when these Calls were sold
05/19/2017 4 May2017 Call options expired
05/23/2017 Sold 400 JPM shares at $84.90

The overall performance result (including commissions) for this JPM covered calls position was as follows:
Stock Purchase Cost: $34,888.95
= ($87.21*400+$4.95 commission)

Net Profit:
(a) Options Income: +$2,248.90
= ($3.16 + $2.50)*400 shares - 2*$7.55 commissions

(b) Dividend Income: +$200.00
= ($.50 dividend per share x 400 shares)
(c) Capital Appreciation (JPM sold at $84.90): -$928.95
+($84.90-$87.21)*400 - $4.95 commissions

Total Net Profit: +$1,519.95
= (+$2,248.90 +$200.00 -$928.95)

Absolute Return: +4.4%
= +$1,519.95/$34,888.95
Annualized Return: +26.1%
= (+$1,519.95/$34,888.95)*(365/61 days)