Thursday, July 27, 2017

Established Covered Calls Position in Express Scripts Holding Co.

Today, a covered calls position was established in Express Scripts Holding Co. (ticker symbol ESRX) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current market outlook, an in-the-money covered calls position was established with the strike price of $60.00, below the stock purchase price of $62.47.

As shown in the chart below, a Covered Calls positions was established since the potential annualized return-on-investment result of +15.5% for the Covered Calls was slightly better than the +14.7% for its synthetically equivalent short Put options position


As shown above and also as detailed below, this Express Scripts Covered Calls position has the potential for a +1.0% absolute return in 23 days (equivalent to a +15.5% annualized return-on-investment).   



Express Scripts Holding Co. (ESRX) -- New Covered Calls Position
The transactions were as follows:
07/27/2017  Bought 400 Express Scripts Holding Co. shares @ $62.47
07/27/2017 Sold 4 ESRX Aug 18, 2017 $60.00 Call options @ $3.07
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Cost Basis: $23,767.55
= ($62.47 - $3.07) *400 shares + $7.55 commissions

Net Profit:
(a) Options Income: +$1,225.32
= ($3.07*400 shares) - $2.68 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If ESRX is above $60.00 strike price at Aug 18th expiration): -$992.95
= ($60.00-$62.47)*400 shares - $4.95 commissions

Total Net Profit (If ESRX is above $60.00 strike price at Aug 18, 2017 options expiration): +$232.37
= (+$1,225.32 options income +$0.00 dividends -$992.95 capital appreciation)

Absolute Return: +1.0%
= +$232.37/$23,767.55
Annualized Return: +15.5%
= (+$232.37/$23,767.55)*(365/23 days)

The downside 'breakeven price' at expiration is at $59.40 ($62.47 - $3.07), which is 4.9% below the current market price of $62.47.  A recent quantitative study titled "Which Index Options Should You Sell" link provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options at -0.5 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Express Scripts position, the $60.00 front month option was chosen since its breakeven price is -0.7 standard deviations from the current price of $62.47 and its implied volatility was 23.0.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Express Scripts Holding Co. covered calls position is 75.8%. This compares with a probability of profit of 50.3% for a buy-and-hold of Express Scripts stock over the same time period. Using this probability of profit of 75.8%, the Expected Value annualized ROI of this investment (if held until expiration) is +12.2% (+15.5% * 78.5%), an attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $65.54 ($62.47 + $3.07).  This is the price above which it would have been more profitable to simply buy-and-hold Express Scripts stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

Wednesday, July 26, 2017

Established Covered Calls Position in Intel Corp. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Intel Corp. (ticker symbol INTC) with an August 18, 2017 expiration and at the $34.00 strike price.  This position has an upcoming quarterly ex-dividend on August 3rd of $.2725 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the Aug 18th options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  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 comparable short 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".  Intel does have a quarterly earnings report prior to the options expiration.  In fact, they will report after the market close tomorrow.  I decided to go forward and establish this position because semiconductor manufacturers Texas Instruments and Advanced Micro Devices (same industry as Intel) released their quarterly report yesterday.  Both companies beat analysts' revenue and earnings estimates and they guided next quarter higher than previous guidance -- and their stocks moved higher as a result.  I expect similar good results from Intel.

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 Intel 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 for Intel. 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 Intel Corp. position.



Details for this position as well as possible return-on-investment outcomes are provided below.

Intel Corp. -- Covered Calls Position Established
An ex-dividend occurs on August 3rd for $.2725.  If the current time value (i.e. extrinsic value) of $.40 [$1.05 option premium - ($34.65 stock price - $34.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by August 2nd (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 600 Intel shares away to capture the dividend payment.

The transactions were:
07/26/2017 Bought 600 INTC shares @ $34.65
07/26/2017 Sold 6 INTC Aug 18, 2017 $34.00 Call options @ $1.05
Note: a simultaneous buy/write transaction was executed.
08/03/2017 Upcoming quarterly ex-dividend of $.2725 per share

Two possible overall performance results (including commissions) for this Intel covered calls position are as follows:
Stock Purchase Cost: $20,794.95
= ($34.65*600+$4.95 commission)

Net Profit:
(a) Options Income: +$626.10
= ($1.05*600 shares) - $3.90 commissions
(b) Dividend Income (If option exercised early on August 2nd, the business day prior to ex-div date): +$0.00; or
(b) Dividend Income (If INTC assigned at Aug 18th, 2017 expiration): +$163.50
= ($.2725 dividend per share x 600 shares)
(c) Capital Appreciation (If INTC assigned early): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions; or
(c) Capital Appreciation (If INTC assigned at $34.00 strike price at Aug 18th options expiration): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions

1. Total Net Profit [If option exercised early]: +$231.15
= (+$626.10 options income +$0.00 dividend income -$394.95 capital appreciation); or
2. Total Net Profit (If INTC assigned at $34.00 at expiration): +$394.65
= (+$626.10 options income +$163.50 dividend income -$394.95 capital appreciation)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.11%
= +$231.15/$20,794.95
Annualized Return (If option exercised early): +50.7%
= (+$231.15/$20,794.95)*(365/8 days); or
2. Absolute Return (If INTC assigned at $34.00 on August 18, 2017 expiration date): +1.90%
= +$394.65/$20,794.95
Annualized Return (If INTC assigned at $34.00 on August 18th options expiration date): +28.9%
= (+$394.65/$20,794.95)*(365/24 days)

Early assignment is preferable to the Covered Calls Advisor since it would provide a higher annualized return-on-investment result, but either outcome would provide an excellent result for this investment position.  These returns will be achieved as long as the stock is above the $34.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.3275 ($34.65 -$1.05 -$.2725) provides 3.8% downside protection below today's $34.65 purchase price. 

Continuation of Covered Calls Position in Devon Energy Corp.

Upon the July 21, 2017 options expiration last week, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $33.00 strike price.  So, the July Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when Devon stock was at $33.63, a sell-to-open order was executed to sell 5 August 18th, 2017 Call options at the $35.00 strike price for $.65 per share to continue the Devon Covered Calls position.

The history of this Devon Energy position so far as well as a potential return-on-investment result is detailed below:

Devon Energy Corp. (DVN) -- Continuation 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 June 16, 2017 $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)
06/16/2017 5 DVN June 16th, 2017 Call options expired
Note: the price of DVN stock closed at $31.76 upon the June 16th options expiration date.
07/03/2017 Sold 5 DVN July 21, 2017 $33.00 Call options @ $.87 per share
07/21/2017 5 DVN Call options expired
07/26/2017 Sold 5 DVN Aug 18, 2017 $35.00 Call options @ $.65 per share

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: +$1,800.25
= ($2.10 + $.87+ $.65) *500 shares - 3*$3.25 commissions
(b) Dividend Income: +$30.00
= $.06 * 500 shares
(c) Capital Appreciation (If DVN is above $35.00 strike price at August 18th, 2017 expiration): -$1,229.95
= ($35.00-$37.45)*500 shares - $4.95 commissions

Total Net Profit (If DVN stock is above $35.00 strike price at August 18, 2017 options expiration): +$600.30
= (+$1,800.25 options income +$30.00 dividends -$1,229.95 capital appreciation)

Absolute Return: +3.2%
= +600.30/$18,729.95
Annualized Return: +13.8%
= (+600.30/$18,729.95)*(365/85 days)

Established Covered Calls Position in Range Resources Corp.

Today, a covered calls position was established in Range Resources Corp. (ticker symbol RRC) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $21.00 slightly below the stock purchase price of $21.65. 

As detailed below, there is potential for a +2.7% absolute return in 24 days (equivalent to a +41.0% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks.

Range Resources Corp. (RRC) -- New Covered Calls Position
The transactions were as follows:
07/26/2017  Bought 500 Range Resources Corp. shares @ $21.65
07/26/2017 Sold 5 RRC Aug 18, 2017 $21.00 Call options @ $1.25
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 500 shares RRC: $10,829.95
= $21.65*500 + $4.95 commission

Net Profit:
(a) Options Income: +$621.75
= ($1.25*500 shares) - $3.25 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $21.00 strike price at Aug 18th expiration): -$329.95
= ($21.00-$21.65)*500 shares - $4.95 commissions

Total Net Profit (If RRC is above $21.00 strike price at Aug 18, 2017 options expiration): +$291.80
= (+$621.75 options income +$0.00 dividends -$329.95 capital appreciation)

Absolute Return: +2.7%
= +$291.80/$10829.95
Annualized Return: +41.0%
= (+$291.80/$10829.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $20.40 ($21.65 - $1.25), which is 5.8% (.55 standard deviations) below the current market price of $21.65.  A recent quantitative study titled "Which Index Options Should You Sell" link provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options at -0.5 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Range Resources position, the $21.00 front month option was chosen since its breakeven price is -0.55 standard deviations from the current price of $21.65.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Range Resources Corp. covered calls position is 65.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Range Resources stock over the same time period. Using this probability of profit of 65.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +26.9% (+41.0% * 65.5%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $22.90 ($21.65 + $1.25).  This is the price above which it would have been more profitable to simply buy-and-hold Range Resources stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

Tuesday, July 25, 2017

Closed Foot Locker Inc. Position

There were nine July 21, 2017 options expiration positions in the Covered Calls Advisor Portfolio.  As detailed here (link), seven of the nine positions closed on or before expiration with substantial profits.  The remaining two positions (Devon Energy Co. and Foot Locker Inc.) closed at expiration with their stock price below the strike price.  Today, the Foot Locker position was closed out at a net loss by selling the 500 long shares that remained after last Friday's expiration.  The detailed results from this position are provided below.


Foot Locker Inc. (FL) -- Position Closed
The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Ex-dividend of $.31 per share
07/21/2017 5 FL Call options expired with stock price of $47.21 below the $48.00 strike price
07/25/2017 Sold 500 shares of Foot Locker at $45.74

The overall performance result (including commissions) for this Foot Locker position was as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)

Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions

(b) Dividend Income: +$155.00
= ($.31 dividend per share x 500 shares)
(c) Capital Appreciation (FL stock sold at $45.74: -$1,994.95
+($45.74-$49.72)*500 - $4.95 commissions

Total Net Loss: -$788.15
= (+$1,051.80 +$155.00 -$1,994.95)

Absolute Return: -3.2%
= -$788.15/$24,864.95
Annualized Return: -64.3%
= (-$788.15/$24,864.95)*(365/18 days)

Saturday, July 22, 2017

July 2017 Option Expiration Results

The Covered Calls Advisor Portfolio had nine positions with July 21, 2017 options expirations.  Three positions were closed prior to the July 21st expiration:
  • One covered calls position in JPMorgan Chase & Co. was closed by early assignment --See detailed results here: link
  • Two of these (Range Resources Corp. and Alibaba Group Holding Ltd.) were closed out by the Covered Calls Advisor a week early (on July 14th) since the short Puts had declined to only $.05 (See detailed results here: Range Resources link and here Alibaba link). 
Of the total nine positions, the remaining six were held until yesterday's July 21st expiration.  Of these, four positions (Pioneer Resources Co., Quanta Services Inc., Twenty-First Century Fox Inc., and Voya Financial Inc.) closed in-the-money, so the maximum possible return-on-investment result was achieved.  Details of the transactions and results for each of these positions are provided below.

The return-on-investment results for each closed position was:
  • Pioneer Resources Co.:  +1.8% absolute return (+17.9% annualized return) in 36 days
  • Quanta Services Inc.:  +1.9% absolute return (+17.6% annualized return) in 40 days  
  • Twenty-First Century Fox Inc.+3.1% absolute return (+15.4% annualized return) in 74 days
  • Voya Financial Inc.:  +1.6% absolute return (+19.2% annualized return) in 30 days 
The cash now available in the Covered Calls Advisor Portfolio from the closing of these four 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 Foot Locker Inc.) 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 they are either sold or a continuation covered calls position is established. 

The details for each of the closed positions is as follows:


1.  Pioneer Resources Co. -- 100% Cash-Secured Put Option Closed at Expiration
This position was established when the price of Pioneer Natural Resources was $156.93 (4.4% downside protection to the $150.00 strike price) and 36 days remaining until the July 21st options expiration date.

The implied volatility of the Put options was 27.8 when this position was established; so the $2.70 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 transactions were as follows:
06/16/2017  Sold 1 PXD July 21, 2017 $150.00 100% cash-secured Put option @ $2.70
07/21/2017 1 PXD Put option expired
Note: Price of PXD was $160.21 on July 21st options expiration date

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 option sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $15,000.00
= $150.00*100

Net Profit:
(a) Options Income: +$264.40
= ($2.70*100 shares) - $5.60 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (PXD was above $150.00 strike price at Jul2017 expiration): +$0.00
= ($150.00-$150.00)*100 shares

Total Net Profit: +$264.40
= (+$264.40 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.8%
= +$264.40/$15,000.00
Annualized Return: +17.9%
= (+$264.40/$15,000.00)*(365/36 days)


2. Quanta Services Inc. (PWR) -- Covered Calls Position Closed
The transactions have been as follows:
05/08/2017  Sold 6 PWR Jun2017 $33.00 100% cash-secured Put options @ $.65
Note: the price of PWR was $34.27 today when this transaction was executed.
06/16/2017 6 PWR Jun2017 Put options expired and 600 shares of PWR were purchased at $33.00 strike price
Note: the price of PWR was $32.10 upon the market close last Friday at Jun2017 expiration
06/19/2017 Sold 6 PWR July 21, 2017 $33.00 Call options @ $.55
Note: the price of PWR was $32.28 when these Call options were sold
07/21/2017 6 Call options in-the-money at expiration, so 600 shares of PWR were sold at $33.00 strike price
Note: the price of PWR was slightly in-the-money at $33.05 upon expiration

The performance result (including commissions) was as follows:
Cost Basis: $19,804.95
= $33.00*600 + $4.95 commission

Net Profit:
(a) Options Income: +$702.30
= ($.65 + $.55) *600 shares - 2*$8.85 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($33.00-$33.00)*600 shares

Total Net Profit (PWR stock was above $33.00 strike price at July 21, 2017 expiration): +$381.15
= (+$381.15 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (PWR above $33.00 strike price at July 21, 2017 options expiration): +1.9%= +$381.15/$19,804.95
Annualized Return: +17.6%
= (+$381.15/$19,804.95)*(365/40 days)


3. Twenty-First Century Fox Inc. (FOXA) -- Covered Calls Position Closed
The transactions have been as follows:
05/08/2017  Sold 10 FOXA Jun2017 $28.00 100% cash-secured Put options @ $.65
Note: the price of FOXA stock was $28.88 today when this transaction was executed.
06/16/2017 10 FOXA Jun2017 Put options expired and 1,000 shares of FOXA were purchased at $28.00 strike price
Note: the price of FOXA was $27.45 upon the market close last Friday at Jun2017 expiration
06/19/2017 Sold 10 FOXA July 21, 2017 $27.00 Call options @ $1.25
Note: the price of FOXA was $27.76 when these Call options were sold
07/21/2017 10 FOXA Call options in-the-money at expiration, so 1,000 shares of FOXA were sold at $27.00 strike price
Note: the price of FOXA was at $27.84 upon expiration


The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 + $4.05 commission

Net Profit:
(a) Options Income: +$1,877.10
= ($.65 +$1.25) *1,000 shares - 2*$11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (FOXA is above $27.00 strike price at July 21, 2017 expiration): -$1,000.00
= ($27.00-$28.00)*1,000 shares

Total Net Profit: +$877.10
= (+$1,877.10 options income +$0.00 dividend income -1,000.00 capital appreciation)

Absolute Return: +3.1%
= +$877.10/$28,004.95
Annualized Return: +15.4%
= (+$877.10/$28,004.95)*(365/74 days)


4. Voya Financial Inc. (VOYA) -- 100% Cash-Secured Puts Closed
This position was established when the price of Voya Financial Inc. was $35.04 (3.0% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 23.5 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 (i.e. strike price below the current stock price).    

The transaction was as follows:
06/22/2017  Sold 7 VOYA July 21, 2017 $34.00 100% cash-secured Put options @ $.55
Note: the price of VOYA was $35.04 today when this transaction was executed.
07/21/2017 7 VOYA Put options expired
Note: Price of VOYA was $37.58 on July 21st options expiration date

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 seven Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $23,800.00
= $34.00*700 shares

Net Profit:
(a) Options Income: +$375.50
= ($.55*700 shares) - $9.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (VOYA was above $34.00 strike price at July 21st expiration): +$0.00
= ($34.00-$34.00)*700 shares

Total Net Profit: +$375.50
= (+$375.50 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return : +1.6%
= +$375.50/$23,800.00
Annualized Return: +19.2%
= (+$375.50/$23,800.00)*(365/30 days)

Friday, July 14, 2017

Closed Position in Range Resources Corp.

Today, the Covered Calls Advisor closed out the ten Range Resources Corp. (ticker symbol RRC) July 21, 2017 short Put options position at the $20.00 strike price.  This decision was made since the price of Range Resources stock has risen from $21.44 when the Puts were originally sold to $22.53 today.  So, the majority of the maximum potential profit has already been achieved since the Put options that originally were sold for $.45 per share were today bought back at only $.05 and with 7 days remaining until the July 21, 2017 options expiration date.  Another benefit of closing the position today is that Schwab now offers commission-free transactions on option buy-to-close transactions at $.05 or less.

As detailed below, the actual return-on-investment result for this closed position was a +1.94% absolute return (equivalent to +29.5% annualized return) for the 24 days holding period.  This +29.5% annualized return result was slightly higher than the +25.0% annualized ROI that would have occurred if the Put options had instead expired on the July 21st options expiration date.

The details achieved from closing this Range Resources Corp. position today are as follows:

Range Resources Corp. (RRC) -- Closing Position
This position was established when the price of Range Resources Corp. was $21.44 (6.7% downside protection to the strike price) and 32 days remaining until the July 21st options expiration date.

With the recent decline in the price of oil and gas being accompanied by a swift decline in energy-related stocks, the implied volatility of options in Range Resources have increased substantially from an average of 33.0 during the last quarter to 41.2 this morning when this position was established; so the $.45 price per share received when the Puts were sold is an attractive premium to receive for these out-of-the-money Put options.    

The transactions were as follows:
06/20/2017  Sold 10 RRC July 21, 2017 $20.00 100% cash-secured Put options @ $.45
Note: the price of RRC was $21.44 when these Put options were sold
07/14/2017 Bought-to-Close 10 RRC Put options @ $.05 per share
Note: the price of RRC was $22.53 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 ten Put options sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $20.00*1,000

Net Profit:
(a) Options Income: +$388.55
= ($.45 -$.05)*1,000 shares - $11.45 commissions
Note: No commission by Schwab on buy-to-close transactions at or below $.05 per share
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($20.00-$20.00)*1,000 shares

Total Net Profit: +$388.55
= (+$388.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.94%
= +$388.55/$20,000.00
Annualized Return: +29.5%
= (+$388.55/$20,000.00)*(365/24 days)

Closed Position in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor closed out the Alibaba Group Holding Ltd (ticker symbol BABA) July 21, 2017 short Put options position at the $135.00 strike price.  This decision was made since the price of BABA has risen quickly from the $138.41 price originally to $150.69 today so that there was only $.05 of time value remaining in the Put options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved with 7 days remaining until the July 21, 2017 options expiration date.  Another benefit is that Schwab now offers commission-free transactions on option buy-to-close transactions at $.05 or less.

As detailed below, the actual return-on-investment result for this closed position was a +1.84% absolute return (equivalent to +44.7% annualized return) for the 15 days holding period.  This 44.7% annualized return result was higher than the +29.7% annualized ROI that would have occurred if the Put options had instead expired on the July 21st options expiration date.

The details achieved from closing this Alibaba position today are as follows:

Alibaba Group Holding Ltd (BABA) -- Closing Position
The transactions were as follows:
06/29/2017  Sold 2 BABA 100% cash-secured $135.00 Put options with July 21, 2017 expirations @ $2.56
Note: the price of Alibaba was $138.41 today when this transaction was executed.
07/14/2017 Bought-to-Close 2 BABA Put options @ $.05 per share
Note: the price of BABA was $150.69 when this transaction was executed.

The overall performance result (including commissions) was follows:
100% Cash-Secured Cost Basis: $27,000.00
= $135.00*200 shares

Net Profit:
(a) Options Income: +$495.75
= ($2.56 -$.05) * 200 shares - $6.25 commissions
Note: No commission by Schwab on buy-to-close transactions at or below $.05 per share
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($135.00 -$135.00)*200 shares

Total Net Profit: +$495.75
= (+$495.75 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.84%
= +$495.75/$27,000.00
Annualized Return: +44.7%
= (+$505.75/$27,000.00)*(365/15 days)

Friday, July 7, 2017

Established Covered Calls Position in Foot Locker Inc. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Foot Locker Inc. (ticker symbol FL) with a July 21, 2017 expiration and at the $48.00 strike price.  This position has an upcoming quarterly ex-dividend on July 12th of $.31 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the July 21st options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  A Covered Calls positions was preferable to its comparable short Put options position in this instance since the maximum potential income of $.71 ($.31 ex-div plus $.40 time value) for the Covered Calls was $.04 per share greater than the $.67 that was then available for selling 100% cash-secured Put options.   

As detailed below, a potential return-on-investment result is +0.75% absolute return (equivalent to +54.9% annualized return for the next 5 days) if the stock is assigned early (business day prior to July 12th ex-date); OR +1.4% absolute return (equivalent to +33.5% annualized return over the next 15 days) in the much more likely event that the stock is assigned on the July 21, 2017 options expiration date.


Foot Locker Inc. (FL) -- New Covered Calls Position
An ex-dividend occurs on July 12th for $.31.  If the current time value (i.e. extrinsic value) of $.40 [$2.12 option premium - ($49.72 stock price - $48.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by July 11th (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 500 Foot Locker shares away to capture the dividend payment.

The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Upcoming quarterly ex-dividend of $.31 per share

Two possible overall performance results (including commissions) for this Foot Locker covered calls position are as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)

Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions
(b) Dividend Income (If option exercised early on July 11th, the business day prior to July 12th ex-div date): +$0.00; or
(b) Dividend Income (If FL assigned at July 21st, 2017 expiration): +$155.00
= ($.31 dividend per share x 500 shares)
(c) Capital Appreciation (If FL assigned early on July 11th): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions; or
(c) Capital Appreciation (If FL assigned at $48.00 strike price at July 21st options expiration): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions

1. Total Net Profit [If option exercised on July 11th (business day prior to July 12th ex-dividend date)]: +$186.85
= (+$1,051.80 +$0.00 -$864.95); or
2. Total Net Profit (If FL assigned at $48.00 at July 21st expiration): +$341.85
= (+$1,051.80 +$155.00 -$864.95)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +0.75%
= +$186.85/$24,864.95
Annualized Return (If option exercised early): +54.9%
= (+$186.85/$24,864.95)*(365/5 days); or
2. Absolute Return (If FL assigned at $48.00 at July 21, 2017 expiration): +1.4%
= +$341.85/$24,864.95
Annualized Return (If FL assigned at $48.00 at July 21st expiration): +33.5%
= (+$341.85/$24,864.95)*(365/15 days)

Either outcome provides an excellent return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $48.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $47.29 ($49.72 -$2.12 -$.31) provides 4.9% downside protection below today's purchase price.

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, all eleven criteria are achieved for this Foot Locker Inc. position.

Monday, July 3, 2017

Continuation of Covered Calls Position in Devon Energy Corp.

Upon the July 21, 2017 options expiration last week, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $33.00 strike price.  So, the July Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when Devon stock was at $33.63, a sell-to-open order was executed to sell 5 August 18th, 2017 Call options at the $35.00 strike price for $.65 per share to continue the Devon Covered Calls position.

The history of this Devon Energy position so far as well as a potential return-on-investment result is detailed below:

Devon Energy Corp. (DVN) -- Continuation 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 June 16, 2017 $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)
06/16/2017 5 DVN June 16th, 2017 Call options expired
Note: the price of DVN stock closed at $31.76 upon the June 16th options expiration date.
07/03/2017 Sold 5 DVN July 21, 2017 $33.00 Call options @ $.87 per share
07/21/2017 5 DVN Call options expired
07/26/2017 Sold 5 DVN Aug 18, 2017 $35.00 Call options @ $.65 per share

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: +$1,800.25
= ($2.10 + $.87+ $.65) *500 shares - 3*$3.25 commissions
(b) Dividend Income: +$30.00
= $.06 * 500 shares
(c) Capital Appreciation (If DVN is above $35.00 strike price at August 18th, 2017 expiration): -$1,229.95
= ($35.00-$37.45)*500 shares - $4.95 commissions

Total Net Profit (If DVN stock is above $35.00 strike price at August 18, 2017 options expiration): +$600.30
= (+$1,800.25 options income +$30.00 dividends -$1,229.95 capital appreciation)

Absolute Return: +3.2%
= +600.30/$18,729.95
Annualized Return: +13.8%
= (+600.30/$18,729.95)*(365/85 days)

Saturday, July 1, 2017

Early Assignment of JPMorgan Chase & Co. Covered Calls

Early this morning I received email and text notifications from my broker (Schwab) that the 4 JPMorgan Chase & Co. (ticker symbol JPM) Call options were exercised early, so the 400 shares of JPM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $82.50 strike price. 

Details of the transactions and the result for this JPMorgan Chase position are provided below.  The per share price had increased from $84.73 when the position was originally established (on May 30th) to $91.40 at yesterday's market close.  The time value remaining in the Call options (based on the $9.10 midpoint of the $8.80/$9.40 bid/ask spread at the market close yesterday) was $.20 [$9.10- ($91.40 - $82.50)] and the Call owners exercised their option to buy the shares in order to capture the dividend.

There are two reasons that I preferred this outcome (i.e. early assignment) instead of keeping the covered calls position and capturing the upcoming $.50 per share ex-dividend on Monday:
  • Early assignment resulted in  a somewhat higher annualized return-on-investment (16.1% achieved) rather than if the position had instead been assigned on the July 21st options expiration date which (including the $.50 per share dividend) would have resulted in a 13.8% annualized ROI; and
  • JPMorgan Chase & Co. will report their 2nd quarter earnings on July 14th which is prior to the July 21st options expiration date.  Because of the uncertainty associated with earnings reports, the Covered Calls Advisor prefers to avoid holding positions on earnings reporting days.
As detailed below, the actual return-on-investment result achieved for this JPMorgan Chase & Co. position was a +1.4% absolute return (equivalent to +16.1% annualized return) for the 32 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 transactions details of which will be posted on this blog site the same day that they occur.


JPMorgan Chase & Co. -- Position Closed
The transactions were:
05/30/2017 Bought 400 JPM shares @ $84.73
05/20/2017 Sold 4 JPM Jul2017 $82.50 Call options @ $3.46
Note: a simultaneous buy/write transaction was executed.
07/03/2017 Upcoming quarterly ex-dividend of $.50 per share
06/30/2017 4 JPM July 21, 2017 Call options exercised, so 400 shares of JPM sold at $82.50 strike price

The overall performance result (including commissions) for this JPM covered calls position were as follows:
Stock Purchase Cost: $33,896.95
= ($84.73*400+$4.95 commission)

Net Profit:
(a) Options Income: +$1,376.45
= ($3.46*400 shares) - $7.55 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (JPM stock assigned early on June 30th): -$896.95
+($82.50-$84.73)*400 - $4.95 commissions

Total Net Profit: +$479.50
= (+$1,376.45 +$0.00 -$896.95)

Absolute Return: +1.4%
= +$479.50/$33,896.95
Annualized Return: +16.1%
= (+$479.50/$33,896.95)*(365/32 days)

Thursday, June 29, 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 two July 21st, 2017 Put options at the $135.00 strike price. This position is a relatively conservative one since it was established when the price of Alibaba was $138.41 (2.5% downside protection to the strike price) and 23 calendar days remaining until the options expiration date.

As detailed below, the Alibaba Group Holding Ltd. investment will yield a +1.9% absolute return in 23 days (which is equivalent to a +29.7% annualized return-on-investment) if Alibaba stock closes above the $135.00 strike price on the July 21st 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 two Put options sold.

The implied volatility of the Put options was 29.9 when this position was established; so the $2.56 price per share received when the Puts were sold is a nice premium for these out-of-the-money (i.e. strike price below the current stock price) Put options .

Alibaba Group Holding Ltd (BABA) --New 100% Cash-Secured Put Options Position
The transaction was as follows:
06/29/2017  Sold 2 BABA 100% cash-secured $135.00 Put options with July 21, 2017 expirations @ $2.56
Note: the price of Alibaba was $138.41 today when this transaction was executed.

A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $27,000.00
= $135.00*200 shares

Net Profit:
(a) Options Income: +$505.75
= ($2.56 * 200 shares) - $6.25 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA closes above $135.00 strike price at July 21, 2017 expiration): +$0.00
= ($135.00 -$135.00)*200 shares

Total Net Profit: +$505.75
= (+$505.75 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.87%
= +$505.75/$27,000.00
Annualized Return: +29.7%
= (+$505.75/$27,000.00)*(365/23 days)

The downside 'breakeven price' at expiration is at $132.44 ($135.00 - $2.56), which is 4.3% below the current market price of $138.41.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the July 21st, 2017 options expiration) for this Alibaba short Puts position is 65.0%. This compares with a probability of profit of 50.2% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 65.0% the expected value annualized return-on-investment (if held until expiration) is +19.3% (+29.7% maximum potential annualized return on investment * 65.0%), an attractive risk/reward profile for this somewhat conservative investment.  

The 'crossover price' at expiration is $140.97 ($138.41 + $2.56).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the July 21st options expiration date rather than selling these Put options.

Thursday, June 22, 2017

Established New Position in Voya Financial Inc.

Today, a new position was established in Voya Financial Inc.(ticker VOYA) by selling seven July 21, 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 30 days (equivalent to a +19.2% 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 $35.04 (3.0% downside protection to the strike price) and 30 days remaining until the options expiration date.

The implied volatility of the Put options was 23.5 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 (i.e. strike price below the current stock price).    

The transaction was as follows:
06/22/2017  Sold 7 VOYA July 21, 2017 $34.00 100% cash-secured Put options @ $.55
Note: the price of VOYA was $35.04 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 seven Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $23,800.00
= $34.00*700 shares

Net Profit:
(a) Options Income: +$375.50
= ($.55*700 shares) - $9.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VOYA is above $34.00 strike price at July 21st expiration): +$0.00
= ($34.00-$34.00)*700 shares

Total Net Profit (If Voya Financial Inc. stock price is above $34.00 strike price at July 21st options expiration): +$375.50
= (+$375.50 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Voya Financial Inc. stock price is above $34.00 strike price at July 21st options expiration) : +1.6%
= +$375.50/$23,800.00
Annualized Return: +19.2%
= (+$375.50/$23,800.00)*(365/30 days)

The downside 'breakeven price' at expiration is at $33.45 ($34.00 - $.55), which is 4.5% below the current market price of $35.04.

The probability of making a profit (if held until the July 21, 2017 options expiration) for this Voya Financial Inc. short Puts position is 68.6%. 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 68.6%, the expected value annualized return-on-investment (if held until expiration) is +13.2% (+19.2% * 68.6%), a satisfactory risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $35.59 ($35.04 + $.55).  This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the July 21st, 2017 options expiration date rather than selling these Put options.

Tuesday, June 20, 2017

Established New Position in Range Resources Corp.

During the first half hour of  trading this morning, a good-til-cancelled order was placed to sell ten July 21st, 2017 Range Resources Corp. (ticker RRC) Put options at the $20.00 strike price for $.45 per share.  At 11:00am, the order was executed when the stock was at $21.44.

As detailed below, there is potential for a +2.2% absolute return in 32 days (equivalent to a +25.0% annualized return-on-investment).

Range Resources Corp. (RRC) -- New 100% Cash-Secured Puts Position
This position was established when the price of Range Resources Corp. was $21.44 (6.7% downside protection to the strike price) and 32 days remaining until the July 21st options expiration date.

With the recent decline in the price of oil and gas being accompanied by a swift decline in energy-related stocks, the implied volatility of options in Range Resources have increased substantially from an average of 33.0 during the last quarter to 41.2 this morning when this position was established; so the $.45 price per share received when the Puts were sold is an attractive premium to receive for these out-of-the-money Put options.    

The transaction was as follows:
06/20/2017  Sold 10 RRC July 21, 2017 $20.00 100% cash-secured Put options @ $.45

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 ten Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $20.00*1,000

Net Profit:
(a) Options Income: +$438.55
= ($.45*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $20.00 strike price at July 21,2017 expiration): +$0.00
= ($20.00-$20.00)*1,000 shares

Total Net Profit (If Range Resources stock price is above $20.00 strike price at July 21st options expiration): +$438.55
= (+$438.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If RRC is above $20.00 strike price at July 21st, 2017 options expiration): +2.2%
= +$438.55/$20,000.00
Annualized Return: +25.0%
= (+$438.55/$20,000.00)*(365/32 days)

The downside 'breakeven price' at expiration is at $19.55 ($20.00 - $.45), which is 8.8% below the current market price of $21.44.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the July 21st, 2017 options expiration) for this Range Resources Corp. short Puts position is 74.1%. This compares with a probability of profit of 50.4% for a buy-and-hold of RRC shares over the same time period. Using this probability of profit of 74.1%, the expected value annualized return-on-investment (if held until expiration) is +18.5% (+25.0% * 74.1%), an attractive risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $21.89 ($21.44 + $.45).  This is the price above which it would have been more profitable to simply buy-and-hold Range Resources stock until the July 21st, 2017 options expiration date rather than selling these Put options.

Monday, June 19, 2017

Continuation of Quanta Services Inc. and Twenty-First Century Fox Inc. Covered Calls Positions

The Covered Calls Advisor Portfolio held six positions at the June 2017 options expiration.  Three of these positions (Antero Resources Corp., D R Horton Inc., and Voya Financial Inc.) were assigned upon expiration and the maximum return-on-investment results were achieved as shown in this prior post: Link
For the other three positions (Devon Energy Corp., Quanta Services Inc, and Twenty-First Century Fox), the price of the equities closed below their strike prices so the options expired worthless and the long shares were retained in the Portfolio.  Today, covered calls were established for two of these companies (Quanta Services and Twenty-First Century Fox) by selling July 21st, 2017 Call options against the stock holdings.  As detailed below, the results if the stocks are assigned upon expiration are:
  • Quanta Services Inc. -- A +1.9% absolute return (equivalent to +17.6% annualized return-on-investment) over 40 days
  • Twenty-First Century Fox Inc. -- A +3.1% absolute return (equivalent to +15.4% annualized return-on-investment) over 74 days

1. Quanta Services Inc. (PWR) -- Continuing Covered Calls Position
The transactions have been as follows:
05/08/2017  Sold 6 PWR Jun2017 $33.00 100% cash-secured Put options @ $.65
Note: the price of PWR was $34.27 today when this transaction was executed.
06/16/2017 6 PWR Jun2017 Put options expired and 600 shares of PWR were purchased at $33.00 strike price
Note: the price of PWR was $32.10 upon the market close last Friday at Jun2017 expiration
06/19/2017 Sold 6 PWR July 21, 2017 $33.00 Call options @ $.55
Note: the price of PWR was $32.28 when these Call options were sold

Two possible overall performance results (including commissions) would be as follows:
Cost Basis: $19,804.95
= $33.00*600 + $4.95 commission

Net Profit:
(a) Options Income: +$702.30
= ($.65 + $.55) *600 shares - 2*$8.85 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PWR stock is unchanged at $32.28 at July 21, 2017 expiration): -$432.00
= ($32.28-$33.00)*600 shares; or
(c) Capital Appreciation (If PWR is above $33.00 strike price at July 21, 2017 expiration): +$0.00
= ($33.00-$33.00)*600 shares

1. Total Net Profit (If Quanta Services stock price is unchanged at $32.28 at July 21, 2017 options expiration): +$381.15; or
= (+$381.15 options income +$0.00 dividend income +$0.00 capital appreciation)
2. Total Net Profit (If Quanta Services stock price is above $33.00 strike price at July 21, 2017 options expiration): +$381.15
= (+$381.15 options income +$0.00 dividend income +$0.00 capital appreciation)

1. Absolute Return (If PWR is above $33.00 strike price at Jun2017 options expiration): +1.9%
= +$381.15/$19,800.00
Annualized Return: +17.6%
= (+$381.15/$19,800.00)*(365/40 days); or
2. Absolute Return (If PWR is above $33.00 strike price at Jun2017 options expiration): +1.9%
= +$381.15/$19,800.00
Annualized Return: +17.6%
= (+$381.15/$19,800.00)*(365/40 days)


2. Twenty-First Century Fox Inc. (FOXA) -- Continuing Covered Calls Position
The transactions have been as follows:
05/08/2017  Sold 10 FOXA Jun2017 $28.00 100% cash-secured Put options @ $.65
Note: the price of FOXA stock was $28.88 today when this transaction was executed.
06/16/2017 10 FOXA Jun2017 Put options expired and 1,000 shares of FOXA were purchased at $28.00 strike price
Note: the price of FOXA was $27.45 upon the market close last Friday at Jun2017 expiration
06/19/2017 Sold 10 FOXA July 21, 2017 $27.00 Call options @ $1.25
Note: the price of FOXA was $27.76 when these Call options were sold

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 + $4.05 commission

Net Profit:
(a) Options Income: +$1,877.10
= ($.65 +$1.25) *1,000 shares - 2*$11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FOXA is above $27.00 strike price at July 21, 2017 expiration): -$1,000.00
= ($27.00-$28.00)*1,000 shares

Total Net Profit: +$877.10
= (+$1,877.10 options income +$0.00 dividend income -1,000.00 capital appreciation)

Absolute Return: +3.1%
= +$877.10/$28,004.95
Annualized Return: +15.4%
= (+$877.10/$28,004.95)*(365/74 days)

Saturday, June 17, 2017

June 2017 Option Expiration Results

The Covered Calls Advisor Portfolio had six positions with June 16th, 2017 options expirations.  Three positions (Antero Resources Corp., D R Horton Inc., and Voya Financial Inc.) closed in-the-money, so the maximum possible return-on-investment result was achieved.  Details of the transactions and results for each of these positions are provided below.

The return-on-investment results for each position was:
  • Antero Resources Corp.:  +2.2% absolute return (+22.2% annualized return) in 36 days
  • D R Horton Inc.:  +1.1% absolute return (+37.6% annualized return) in 11 days  
  • Voya Financial Inc.:  +1.6% absolute return (+23.9% annualized return) in 24 days 
The cash now available in the Covered Calls Advisor Portfolio from the closing of these three 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 other three positions (Devon Energy Corp., Quanta Services Inc., and Twenty-First Century Fox Inc.) 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 they are either sold or a continuation covered calls position is established. 

The details for each of the closed positions is as follows:

1.  Antero Resources Corp. -- 100% Cash-Secured Put Options Position Closed at Expiration
The Covered Calls Advisor had a position in Antero Resources Corp. (ticker symbol AR) by selling ten Jun2017 Put options at the $20.00 strike price. This position was a conservative one since it was established when the price of Antero Resources was $20.86 (4.1% downside protection to the strike price) and 36 days remaining until the options expiration date.

The implied volatility of the Put options was 30.6 when this position was established; so the $.45 price per share received when the Puts were sold was a nice premium to receive for these 4.1% out-of-the-money Put options.    

The transactions were as follows:
05/12/2017  Sold 10 AR Jun2017 $20.00 100% cash-secured Put options @ $.45
Note: the price of Antero was $20.86 when this transaction was executed.
06/16/2017 Put options expired with AR stock price of $22.60 above the $20.00 strike price

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

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $20.00*1,000
Note: the price of AR was $20.86 when these options were sold

Net Profit:
(a) Options Income: +$438.55
= ($.45*1,000 shares) - $11.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Antero stock is above $20.00 strike price at Jun2017 expiration): +$0.00
= ($20.00-$20.00)*1,000 shares

Total Net Profit: +$438.55
= (+$438.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.2%
= +$438.55/$20,000.00
Annualized Return: +22.2%
= (+$438.55/$20,000.00)*(365/36 days)




2.  D R Horton Inc. -- 100% Cash-Secured Put Options Position Closed at Expiration
The transactions were as follows:
06/06/2017  Sold 5 DHI Jun2017 $33.00 100% cash-secured Put options @ $.39
Note: the price of DHI was $33.10 when this transaction was executed.
06/16/2017 Put options expired with DHI stock price of $33.65 above the $33.00 strike price

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $16,500.00
= $33.00*500
Note: the price of DHI was $33.10 when these options were sold

Net Profit:
(a) Options Income: +$186.80
= ($.39*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($33.00-$33.00)*500 shares

Total Net Profit: +$186.80
= (+$186.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return:: +1.1%
= +$186.80/$16,500.00
Annualized Return: +37.6%
= (+$186.80/$16,500.00)*(365/11 days)




3.  Voya Financial Inc. -- 100% Cash-Secured Put Options Position Closed at Expiration
The transactions were 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.
06/16/2017 Put options expired with VOYA stock price of $36.95 above the $34.00 strike price

The overall performance result (including commissions) was 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: +$0.00
= ($34.00-$34.00)*500 shares

Total Net Profit: +$266.80
= (+$266.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +1.6%
= +$266.80/$17,000.00
Annualized Return: +23.9%
= (+$266.80/$17,000.00)*(365/24 days)

Friday, June 16, 2017

Established New Position in Pioneer Natural Resources Co.

Today, a new position was established in Pioneer Natural Resources Co.(ticker PXD) by selling one July 21st, 2017 100% cash-secured Put option at the $150.00 strike price.  The short Put option was chosen instead of the comparable covered call since the potential return-on-investment result was slightly higher for the Put option in this instance.

As detailed below, there is potential for a +1.8% absolute return in 36 days (equivalent to a +17.9% annualized return-on-investment).

Pioneer Natural Resources Co. (PXD) -- New 100% Cash-Secured Puts Position
This position was established when the price of Pioneer Natural Resources was $156.93 (4.4% downside protection to the $150.00 strike price) and 36 days remaining until the July 21st options expiration date.

The implied volatility of the Put options was 27.8 when this position was established; so the $2.70 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:
06/16/2017  Sold 1 PXD July 21, 2017 $150.00 100% cash-secured Put option @ $2.70

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 option sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $15,000.00
= $150.00*100

Net Profit:
(a) Options Income: +$264.40
= ($2.70*100 shares) - $5.60 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PXD is above $150.00 strike price at Jul2017 expiration): +$0.00
= ($150.00-$150.00)*100 shares

Total Net Profit (If Pioneer Natural Resources Co. stock price is above $150.00 strike price at July 21st options expiration): +$264.40
= (+$264.40 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If PXD is above $150.00 strike price at July 21st, 2017 options expiration): +1.8%
= +$264.40/$15,000.00
Annualized Return: +17.9%
= (+$264.40/$15,000.00)*(365/36 days)

The downside 'breakeven price' at expiration is at $147.30 ($150.00 - $2.70), which is 6.1% below the current market price of $156.91.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the July 21st, 2017 options expiration) for this Pioneer Resources short Put position is 71.0%. This compares with a probability of profit of 50.3% for a buy-and-hold of PXD shares over the same time period. Using this probability of profit of 71.0%, the expected value annualized return-on-investment (if held until expiration) is +12.7% (+17.9% * 71.0%), a satisfactory risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $159.61 ($156.91 + $2.70).  This is the price above which it would have been more profitable to simply buy-and-hold PXD stock until the July 21st, 2017 options expiration date rather than selling these Put options.

Tuesday, June 6, 2017

Established New Position in D R Horton Inc.

Earlier today, a covered calls position in home builder PulteGroup Inc.(ticker PHM) was liquidated when the Jun2017 Call options were assigned early and the stock sold (see detailed result of PHM position here: link). The majority of this cash was used to establish five June 2017 100% cash-secured Put options position in another home builder (D R Horton Inc.) at the $33.00 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 +1.1% absolute return in 11 days (equivalent to a +37.6% annualized return-on-investment) with this investment.

D R Horton screens attractively on the Covered Calls Advisor's preferred quality, value, and growth metrics and currently receives the highest rating (5 stars) from S&P Capital along with a $38 12-month price target.  A discounted cash flow estimate (shown in the chart below) using a 6% discount rate and 9% growth rate results in an even more attractive $46.70 fair value estimate.
Note: the $35 'Buy Price' shown provides a 25% margin-of-safety below the DCF Fair Value price.
 


















D R Horton Inc. (DHI) -- New 100% Cash-Secured Puts Position
This position was established when the price of D.R. Horton was $33.10 (0.3% downside protection to the strike price) and 11 days remaining until the options expiration date.

The implied volatility of the Put options was 18.2 when this position was established and the price received was $.39 per share.    

The transaction was as follows:
06/06/2017  Sold 5 DHI Jun2017 $33.00 100% cash-secured Put options @ $.39
Note: the price of DHI was $33.10 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: $16,500.00
= $33.00*500
Note: the price of DHI was $33.10 when these options were sold

Net Profit:
(a) Options Income: +$186.80
= ($.39*500 shares) - $8.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If D R Horton is above $33.00 strike price at Jun2017 expiration): +$0.00
= ($33.00-$33.00)*500 shares

Total Net Profit (If D R Horton stock price is above $33.00 strike price at Jun2017 options expiration): +$186.80
= (+$186.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return:: +1.1%
= +$186.80/$16,500.00
Annualized Return: +37.6%
= (+$186.80/$16,500.00)*(365/11 days)

The downside 'breakeven price' at expiration is at $32.61 ($33.00 - $.39), which is 1.5% below the current market price of $33.10.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Jun 16th, 2017 options expiration) for this DHI short Puts position is 54.3%%. This compares with a probability of profit of 50.3% for a buy-and-hold of DHI shares over the same time period. Using this probability of profit of 54.3%, the expected value annualized return-on-investment (if held until expiration) is +20.4% (+37.6% * 54.3%), a satisfactory risk/reward profile for this short-term investment.  

The 'crossover price' at expiration is $33.49 ($33.10 + $.39).  This is the price above which it would have been more profitable to simply buy-and-hold D R Horton stock until the June 16th, 2017 options expiration date rather than selling these Put options.

Early Assignment of PulteGroup Inc. Covered Calls

PulteGroup Inc. (ticker symbol PHM) goes ex-dividend today at $.09 per share.  The Covered Calls Advisor owned a Pulte June 2017 covered calls position at the $22.00 strike price.  Early this morning (Tuesday morning), I received email and text notifications from my broker (Schwab) that the 10 PHM Call options were exercised early, so the 1,000 shares of PHM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $22.00 strike price. 

Details of the transactions and the result for this Pulte position are provided below.  The per share price had increased from $22.80 when the position was originally established (on May 12th) to $23.31 at yesterday's market close.  The time value remaining in the Call options (based on the $1.40 midpoint of the $1.37/$1.43 bid/ask spread at the market close yesterday) was $.09 [$1.40- ($23.31- $22.00)] and the Call owners exercised their option to buy the shares in order to capture the dividend.  I am pleased since this early assignment resulted in a slightly 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 PulteGroup position was a +1.1% absolute return (equivalent to +15.6% annualized return) for the 25 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 transactions details will be posted on this blog site the same day that they occur. 


PulteGroup Inc. (PHM) -- Position Closed
The transactions were as follows:
05/12/2017 Bought 1,000 Pulte shares @ $22.80
05/12/2017 Sold 10 Pulte Jun2017 $22.00 Call options @ $1.06
Note: a simultaneous buy/write transaction was executed.
06/05/2017 10 PHM Jun2017 Call options exercised, so 1,000 shares of PHM sold at $22.00 strike price

The performance result (including commissions) for this Pulte covered calls position were as follows:
Stock Purchase Cost: $22,804.95
= ($22.80*1,000+$4.95 commission)

Net Profit:
(a) Options Income: +$1,048.55
= ($1.06*1,000 shares) - $11.45 commissions
(b) Dividend Income (stock assigned on day prior to June 6th ex-div date): +$0.00
(c) Capital Appreciation: -$804.95
=+($22.00-$22.80)*1,000 - $4.95 commissions

Total Net Profit (Pulte stock assigned early on June 5th): +$243.60
= (+$1,048.55 options income +$0.00 dividend income -$804.95 capital appreciation)


Absolute Return: +1.1%
= +$243.60/$22,804.95
Annualized Return: +15.6%
= (+$243.60/$22,804.95)*(365/25 days)

Friday, June 2, 2017

Early Close of General Motors Covered Calls

Today, the Covered Calls Advisor closed out the General Motors Co. (ticker symbol GM) covered calls position.  This decision was made since the price of GM has risen quickly from the $32.20 purchase price to $34.27 today so that there was only $.02 of time value remaining in the Call options.  Thus, the overwhelming majority of the maximum potential profit has already been achieved with 4 days remaining until the ex-div date and 14 days remaining until the Jun2017 options expiration date.  It is highly likely the Call options would have been exercised early on Monday in which case an annualized return-on-investment result (as shown in the post describing the original position here: link )would be +33.6%.

The actual return-on-investment result for this closed position was a +1.1% absolute return (equivalent to +50.2% annualized return) for the 8 days holding period.  This 50.2% annualized return result was higher than the +33.6% annualized ROI that would have occurred if the covered calls had instead been exercised next Monday (the day prior to the GM ex-div date).

The details achieved from closing this GM position today are as follows:

General Motors Co. (GM) -- Covered Calls Position Closed
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
06/02/2017 Sold 400 GM shares @ $34.27
06/02/2017 Bought-to-Close 4 GM Jun2017 $31.50 Call options @ $2.79
Note: this was a simultaneous covered calls unwind transaction

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

Net Profit:
(a) Options Income: -$681.20
= ($1.10-$2.79) *400 shares) - $5.20 commissions
(b) Dividend Income: +$0.00;
(c) Capital Appreciation (GM stock sold at $34.27 on June 2nd): +823.05
+($34.27-$32.20)*400 - $4.95 commissions
 Total Net Profit: +$141.85
= (-681.20 options income +$0.00 dividend income +$823.05 capital appreciation)

 Absolute Return: +1.1%
= +$141.85/$12,884.95
Annualized Return: +50.2%
= (+$141.85/$12,884.95)*(365/8 days)

Tuesday, May 30, 2017

Established Covered Calls Position in JPMorgan Chase & Co.

Today, a covered calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) with a July 2017 expiration and at the $82.50 strike price.  This position has an upcoming quarterly ex-dividend on July 3rd of $.50 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the July 21st options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is +1.4% absolute return (equivalent to +16.1% annualized return for the next 32 days) if the stock is assigned early (business day prior to July 3rd ex-date); OR +2.0% absolute return (equivalent to +13.8% annualized return over the next 53 days) if the stock is assigned on the July 21, 2017 options expiration date.


JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend occurs on July 3rd for $.50.  If the current time value (i.e. extrinsic value) of $1.23 [$3.46 option premium - ($84.73 stock price - $82.50 strike price)] remaining in the short call options decays substantially (down to about $.15 or less) by June 30th (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 400 JPM shares away to capture the dividend payment.

The transactions were:
05/30/2017 Bought 400 JPM shares @ $84.73
05/20/2017 Sold 4 JPM Jul2017 $82.50 Call options @ $3.46
Note: a simultaneous buy/write transaction was executed.
07/03/2017 Upcoming quarterly ex-dividend of $.50 per share

Two possible overall performance results (including commissions) for this JPM covered calls position are as follows:
Stock Purchase Cost: $33,896.95
= ($84.73*400+$4.95 commission)

Net Profit:
(a) Options Income: +$1,376.45
= ($3.46*400 shares) - $7.55 commissions
(b) Dividend Income (If option exercised early on June 30th, the business day prior to July 3rd ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at Jul2017 expiration): +$200.00
= ($.50 dividend per share x 400 shares)
(c) Capital Appreciation (If JPM assigned early on June 30th): -$896.95
+($82.50-$84.73)*400 - $4.95 commissions; or
(c) Capital Appreciation (If JPM assigned at $82.50 strike price at Jul2017 expiration): -$896.95
+($82.50-$84.73)*400 - $4.95 commissions

1. Total Net Profit [If option exercised on June 30th (business day prior to July 3rd ex-dividend date)]: +$479.50
= (+$1,376.45 +$0.00 -$896.95); or
2. Total Net Profit (If JPM assigned at $82.50 at Jul2017 expiration): +$679.50
= (+$1,376.45 +$200.00 -$896.95)

1. Absolute Return [If option exercised on Jun 30th (business day prior to ex-dividend date)]: +1.4%
= +$479.50/$33,896.95
Annualized Return (If option exercised early): +16.1%
= (+$479.50/$33,896.95)*(365/32 days); or
2. Absolute Return (If JPM assigned at $82.50 at Jul2017 expiration): +2.0%
= +$679.50/$33,896.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +13.8%
= (+$679.50/$33,896.95)*(365/53 days)

Either outcome provides a satisfactory return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $82.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $80.77 ($84.73 -$3.46 -$.50) provides 4.7% downside protection below today's purchase price.

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, eight of the eleven criteria are achieved for this JPMorgan position.