Saturday, October 21, 2017

October 20th, 2017 Options Expiration Results

The Covered Calls Advisor Portfolio held nine positions with October 20th, 2017 options expirations.   Seven of these positions (Alibaba Group Holding Ltd., Best Buy Inc., Discover Financial Services, JPMorgan Chase & Co., Las Vegas Sands Corp., United States Steel, and Western Digital Corp.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each position:
  • Alibaba Group Holding Ltd.:  +1.3% absolute return (+18.4% annualized return) in 26 days
  • Best Buy Inc.:  +3.96% absolute return (+27.8% annualized return) in 52 days  
  • Discover Financial Services+2.5% absolute return (+19.6% annualized return) in 46 days
  • JPMorgan Chase & Co.:  +3.2% absolute return (+25.2% annualized return) in 46 days
  • Las Vegas Sands Corp.:  +2.6% absolute return (+20.8% annualized return) in 46 days
  • United States Steel+1.5% absolute return (+54.6% annualized return) in 10 days
  • Western Digital Corp.:  +3.6% absolute return (+28.3% annualized return) in 46 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these seven 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.  

The remaining two positions (Devon Energy Corp. and Range Resources Corp.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see holdings in right sidebar) until either the stock is sold or a continuation Covered Calls position is established. 

As an example of how the Return-On-Investment (ROI) results (both Absolute and Annualized ROIs) are calculated, details from the Covered Calls Advisor's Alibaba position are provided below:

Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed on Oct 20th Expiration 
The transactions were as follows:
09/25/2017  Bought 200 Alibaba shares @ $169.05
09/25/2017 Sold 2 BABA October 20, 2017 $160.00 Call options @ $11.15
Note: this was a simultaneous Buy/Write transaction
10/20/2017 200 BABA shares sold at $160.00 strike price upon the Oct 20th options expiration  

The overall performance result (including commissions) was as follows:
Cost Basis: $31,586.29
= ($169.05 -$11.15) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$2,230.00
= ($11.15 *200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA was above $160.00 strike price at Oct 20, 2017 expiration): -$1,814.95
= ($160.00-$169.05)*200 shares - $4.95

Total Net Profit: +$415.05
= (+$2,230.00 options income +$0.00 dividend income -$1,814.95 capital appreciation)

Absolute Return: +1.3%
= +$415.05/$31,586.29
Annualized Return: +18.4%
= (+$415.05/$31,586.29)*(365/26 days)

Wednesday, October 18, 2017

Early Close of Nucor Corp. Covered Calls

Today, the Covered Calls Advisor closed out the Nucor Corp. (ticker symbol NUE) covered calls position.  This decision was made since the price of Nucor has risen quickly from the $54.16 purchase price to $57.35 today so that there was only $.05 of time value remaining in the Call options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved.  Given the stock price uncertainty inherent in tomorrow's earnings report, the Covered Calls Advisor decided to lock in the profit today.

As detailed below, the actual return-on-investment result for this closed position was a +3.1% absolute return (equivalent to +22.3% annualized return) for the 51 days holding period.  

Nucor Corp. -- Covered Calls Position is Closed
The transactions were as follows:
08/28/2017  Bought 200 Nucor Corp. shares @ $54.16
08/28/2017 Sold 2 NUE October 20, 2017 $52.50 Call options @ $2.96
Note: this was a simultaneous buy/write transaction.
09/28/2017 Ex-dividend of $.3775 per share
10/18/2017 Sold 200 Nucor Corp. shares @ $57.35 per share
10/18/2017 Bought-to-Close 2 NUE Oct 20th, 2017 $52.50 Call options @ $4.90 per share

The overall performance result (including commissions) was as follows:
Cost Basis Purchase of 200 shares NUE: $10,246.29
= ($54.16 -$2.96)*200 + $6.29 commissions

Net Profit:
(a) Options Income: -$389.34
= ($2.96 - $4.90) *200 shares - $1.34 commissions
(b) Dividend Income: +$75.50
= $.3775 per share x 200 shares
(c) Capital Appreciation: +$633.05
= ($57.35 -$54.16)*200 shares - $4.95 commissions

Total Net Profit: +$319.21
= (-$389.34 options income +$75.50 dividends +$633.05 capital appreciation)

Absolute Return: +3.1%
= +$319.21/$10,246.29
Equivalent Annualized Return: +22.3%
= (+$330.55/$10,246.29)*(365/51 days)

Friday, October 13, 2017

Covered Calls Established for CVS Health Corporation

Today, a Covered Calls positions were established in CVS Health Corporation (ticker CVS).  Given the Covered Calls Advisor's current cautious overall market outlook, a moderately in-the-money Covered Calls position was established with the November 17th, 2017 $70.00 Call options when the stock price was $72.84.  This $70.00 strike price is -0.5 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  Also, there is an upcoming $.50 ex-dividend prior to the options expiration date which is taken into consideration in the details presented below.

As detailed below, some potential return-on-investment results are:
  • A +1.65% absolute return (equivalent to +60.1% annualized return for the next 10 days) if the stock is assigned early (business day prior to the October 23rd ex-div date); OR 
  • A +2.37% absolute return (equivalent to +24.0% annualized return over the next 36 days) if the stock is assigned on the Nov 17th, 2017 options expiration date.
Either result exceeds the Covered Calls Advisor's target for a greater than +20% potential annualized return-on-investment.

1. CVS Health Corporation (CVS) -- New Covered Calls Position
As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its synthetically equivalent short 100% Cash-Secured Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "YES*" with an indication that "If 'YES' then consider avoiding position".  This position was established because of the Covered Calls Advisor's confidence that analysts' expectations that upcoming earnings per share will be achieved as well as the relatively narrow range of those estimates. 
Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that CVS will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a Covered Calls position in CVS.

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, ten of the eleven criteria are achieved for this CVS Covered Calls position.

For this position, the downside 'breakeven price' at expiration is at $68.35 ($72.84 - $3.99 -$.50), which is 6.2% below the current market price of $72.84. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this CVS Covered Calls position is 68.8%, so the expected value annualized ROI of this investment (if held until expiration) is +16.5% (+24.0% * 68.8%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $76.33 ($72.84 + $3.99 -$.50).  This is the price above which it would have been more profitable to simply buy-and-hold CVS stock until Nov 17th (the November monthly options expiration date) rather than establishing this Covered Calls position.

Wednesday, October 11, 2017

Covered Calls Position Established in United States Steel Corp.

Today, a Covered Calls positions was established in United States Steel (ticker symbol X).  This was established when the stock price was $24.69 and eight October 20th, 2017 $24.00 Calls were sold at $1.05.   U.S. Steel has 2.9% downside protection to the $24.00 strike price, a conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral. 


As detailed below, the potential return-on-investment is +1.5% absolute return in 10 days (equivalent to a +54.6% annualized return-on-investment).  


United States Steel (X) -- New Covered Calls Position
The implied volatility of the Call options was 39.5 when this position was established, a very high level considering that there is no earnings report prior to the Oct. 20th expiration date.
The transactions were as follows:
10/11/2017 Bought 800 shares of United States Steel stock @ $24.69 per share 
10/11/2017 Sold 8 US Steel October 20th, 2017 $24.00 Call options @ $1.05 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: $18,922.31
= ($24.69 - $1.05)* 800 shares + $10.31 commission

Net Profit:
(a) Options Income: +$840.00
= ($1.05* 800 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If USS is above $24.00 strike price at Oct 20th expiration): -$556.95
= ($24.00 -$24.69)* 800 shares - $4.95 commission

Total Net Profit (If US Steel stock price is above $24.00 strike price at Oct 20th options expiration): +$283.05
= (+$840.00 options income +$0.00 dividend income -$556.95 capital appreciation)

Absolute Return: +1.5%
= +$283.05/$18,922.31
Annualized Return: +54.6%
= (+$283.05/$18,922.31)*(365/10 days)

The downside 'breakeven price' at expiration is at $23.64 ($24.69 - $1.05), which is 4.3% below the current market price of $24.69.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this U.S. Steel Covered Calls position is 67.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of US Steel shares over the same time period. Using this probability of profit of 67.8%, the expected value annualized return-on-investment (if held until expiration) is +37.0% (+54.6% * 67.8%).  

The 'crossover price' at expiration is $25.74 ($24.69 + $1.05).  This is the price above which it would have been more profitable to simply buy-and-hold US Steel stock until the October 20th, 2017 options expiration date.