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Thursday, January 11, 2018

Established Covered Calls Position in Micron Technology Inc.

Today, a Covered Calls position was established in Micron Technology Inc. (ticker MU) for the February 16th, 2018 expiration and at the $40.00 strike price when the stock price was $42.65. This is the first Covered Calls position established with a Feb2018 options expiration.   Micron's stock has declined since its earnings report on December 19th when it was trading at $44 per share just prior to its earnings release. 

One of the Screeners developed by the Covered Calls Advisor called the 'QVG Model' (note: 'QVG' stands for Quality, Value, and Growth and uses a combination of factors in these categories.  Micron is one of the stocks that was identified by this screen.  Schwab Equity Ratings, Credit Suisse Research, and Argus give Micron their highest rating. In addition, 28 of 31 analysts tracked by Reuters have Buy or Outperform ratings on Micron.

As detailed below, a potential return-on-investment result is +3.15% absolute return (equivalent to +31.1% annualized return for the next 37 days) if the stock is assigned on the February 16th, 2018 options expiration date.


Micron Technology Inc. (MU) -- New Covered Calls Position

Call options liquidity is very good with 13,395 open interest contracts for the Feb 16th $40.00 Calls.

As shown in the chart below, a Covered Calls positions was chosen instead of its synthetically equivalent short 100% Cash-Secured Put options position in this instance since the annualized ROI potential is higher for the Covered Calls:
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 "NO*" with an indication that "If 'YES' then consider avoiding position".  Micron's next quarterly earnings report is after the February 16, 2018 options expiration date.
Also in the chart above is a column called "Intervening Ex-Div" and "NO" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  Micron does not currently pay a dividend, so the potential for applying a Dividend Capture Strategy is not relevant in this instance.

For this position, the downside 'breakeven price' at expiration is at $38.77 ($42.65 - $3.88), which is 9.1% below the current market price of $42.65. 

The 'crossover price' at expiration is $46.53 ($42.65 + $3.88).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until Feb 16th (the February monthly options expiration date) rather than establishing this Covered Calls position.

If you have any questions or comments to share, please click on the Comments link below. 

Tuesday, January 2, 2018

Covered Calls Established in Bristol-Myers Squibb Co.

Today, a Covered Calls positions was established in Bristol-Myers Squibb Co. (ticker BMY) for the January 19th, 2018 expiration and at the $59.00 strike price when the stock was at $60.94.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.

The Implied Volatility of these options was 28.3 when this position was established and the open interest was 133 contracts.  There is an upcoming ex-dividend of $.40 this Thursday (January 4th) which is included in the analysis below.


As detailed below, a potential outcome for this investment is +1.3% absolute return-on-investment for the next 18 days (equivalent to +26.6% on an annualized return basis) if Bristol-Myers stock closes above the $59.00 strike price on the January 19th options expiration date.


Bristol-Myers Squibb Co. (BMY) -- New Covered Calls Position
The transactions were:
01/02/2018 Bought 500 shares of Bristol-Myers stock @ $60.94 per share 
01/02/2018 Sold 5 Bristol-Myers Jan 19th, 2018 $59.00 Call options @ $2.32 per share
Note: this was a simultaneous Buy/Write transaction
01/04/2018 Upcoming ex-dividend of $.40 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $29,318.30
= ($60.94 - $2.32)* 500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$1,160.00
= ($2.32* 500 shares)
(b) Dividend Income: +$200.00
= $.40 per share * 500 shares 
(c) Capital Appreciation (If BMY is above $59.00 strike price at Jan 19th expiration): -$974.95
= ($59.00 -$60.94)* 500 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$385.05
= (+$1,160.00 options income +$200.00 dividend income -$974.95 capital appreciation)

Absolute Return: +1.3%
= +$385.05/$29,318.30
Equivalent Annualized Return: +26.6%
= (+$385.05/$29,318.30)*(365/18 days)

The downside 'breakeven price' at expiration is at $58.22 ($60.94 - $2.32 - $.40), which is 4.5% below the current market price of $60.94.  This is good downside protection given the nice +26.6% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the January 19th, 2018 options expiration) for this Bristol-Myers Covered Calls position is 70.3%, so the expected value annualized ROI of this investment (if held until expiration) is +18.7% (+26.6% * 70.3%), a nice expected value result for this moderately in-the-money Covered Calls position.  

Closed Postion in Financial Select Sector SPDR Fund

Last Friday, the December 29th, 2017 Covered Calls position in the Financial Select Sector SPDR Fund (ticker symbol XLF) expired with the stock price at $27.91, below the $28.00 strike price -- so the Call options expired and the 1,000 shares were retained in the Covered Calls Advisor's Portfolio.  The stock moved higher this morning at the market opening and the position was closed out by selling the 1,000 shares at $28.00.  As detailed below, this position achieved a return-on-investment result of +1.8% absolute return in 18 days (equivalent to a +36.7% annualized return-on-investment).

Financial Select Sector SPDR Fund (XLF) -- Covered Calls Position Closed
The transactions were as follows:
12/14/2017 Bought 1,000 shares of Financial Select Sector SPDR Fund shares @ $27.80 
12/14/2017 Sold 10 XLF Dec 29th, 2017 $28.00 Call options @ $.18 per share
Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of these Call options was 14.8 
12/15/2017 Ex-Distribution of $128.30 = $.1283 per share x 1,000 shares
12/29/2017 10 XLF Call options expired
Note: the price of XLF was $27.91 at expiration
01/02/2018 Sold 1,000 share of XLF @ $28.00 to close position

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $27,811.65
= ($27.80 - $.18)* 1,000 shares + $11.65 commission

Net Profit Components:
(a) Options Income: +$180.00
= ($.18* 1,000 shares)
(b) Distribution Income: +$128.30
= $.1283 per share * 1,000 shares 
(c) Capital Appreciation (XLF sold at $28.00 on 1/2/2018): +$195.05
= ($28.00 -$27.80)* 1,000 shares - $4.95 commission


Total Net Profit: +$503.35
= (+$180.00 options income +$128.30 distribution income +$195.05 capital appreciation)

Absolute Return: +1.8%= +$503.35/$27,811.65
Equivalent Annualized Return: +36.7%
= (+$503.35/$27,811.65)*(365/18 days)