Monday, May 29, 2017

Overall Market Meter is 'Neutral'

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 changed from Slightly Bearish to a current rating of Neutral.  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 3.14 (see blue line at the bottom of the chart above) is in the Neutral range (Note: the Neutral range is from 3.10 to 3.59).  As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Neutral sentiment is to "on-average sell 1% out-of-the-money covered calls for the next options expiration month".

The macroeconomic and momentum factors are Bullish, the value factors are Bearish, and the Growth factor is Neutral.  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 high at 22.8.  This is higher than the expected current P/E ratio of 18.6 (based on the current 2.2% CPI-U inflation rate for the past year).  The market would have to decline by 18.4% from its current level to reach a P/E ratio of 18.6.  This relatively high current market valuation coupled with expected modest sales and earnings growth over the next year explains why the Covered Calls Advisor Portfolio is now establishing only conservative positions and because of the scarcity of good new investment opportunities, the portfolio is now only 20% invested and holds 80% in cash.


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

Saturday, May 27, 2017

Early Assignment of Goldman Sachs Group Inc. Covered Calls

Goldman Sachs Group Inc. (ticker symbol GS) goes ex-dividend at $.75 per share on Tuesday morning (the next trading day since Monday is Memorial Day and the U.S. stock markets are closed then).  The Covered Calls Advisor owned a GS June 2017 covered calls position at the $205.00 strike price.  Early this morning (Saturday morning), I received email and text notifications from my broker (Schwab) that the 2 GS Call options were exercised early, so the 200 shares of GS stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $205.00 strike price. 

Details of the transactions and the result for this Goldman Sachs position are provided below.  The shares had risen from $216.70 when the position was originally established (on May 19th) to $223.53 at yesterday's market close.  There was no time value remaining in the Call options (based on the $18.53 midpoint of the $18.20/$18.85 bid/ask spread at the market close yesterday), so I was not surprised that the Call owners exercised their option to buy the shares in order to capture the dividend.  But I am not disappointed (instead I am very pleased) since this was the optimal result for this position because early assignment resulted in a higher annualized return-on-investment (see original post link for details) than if the position had instead been assigned on June 16, 2017 (the June 2017 options expiration date).

As detailed below, the actual return-on-investment result achieved for this Goldman Sachs position was a +0.6% absolute return (equivalent to +19.8% annualized return) for the 11 days this position was held.  The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new covered calls position is established, the details of which will be posted on this blog site the same day that it occurs. 


Goldman Sachs Group Inc. (GS) -- Position Closed
The transactions were:
05/19/2017 Bought 200 GS shares @ $216.70
05/19/2017 Sold 2 GS Jun2017 $205.00 Call options @ $13.05
Note: a simultaneous buy/write transaction was executed.
05/26/2017 Owner of Call options exercised their option and 200 shares were assigned at $205.00 strike price
Note: the price of GS was $223.53 at yesterday's (Friday's) market close

The performance result (including commissions) for this GS covered calls position was as follows:
Stock Purchase Cost: $43,344.95
= ($216.70*200+$4.95 commission)

Net Profit:
(a) Options Income: +$2,603.75
= ($13.05*200 shares) - $6.25 commissions
(b) Dividend Income (Options exercised early on May 26th which was the business day prior to the May 30th ex-div date): +$0.00
(c) Capital Appreciation: -$2,344.95
+($205.00-$216.70)*200 - $4.95 commissions

Total Net Profit: +$258.80
= (+$2,603.75 options income +$0.00 dividend income -$2,344.95 capital appreciation)

Absolute Return: +0.6%
= +$258.80/$43,344.95
Annualized Return: +19.8%
= (+$258.80/$43,344.95)*(365/11 days)

Friday, May 26, 2017

Established Covered Calls Position in General Motors Co.

Yesterday, a new covered calls position was 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

1. 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

2. 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 Jun2017 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.