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Wednesday, September 27, 2017

Continuation of Covered Calls Position in Range Resources Corp.

Upon the August 18th, 2017 options expiration, the Covered Calls position in Range Resources Corp. (ticker symbol RRC) expired with the stock price below the $21.00 strike price.  So, the August Call options expired and the 500 shares of Range Resources stock were retained in the Covered Calls Advisor Portfolio.  Today, with RRC stock at $20.03, a sell-to-open order was executed to sell 5 October 20th, 2017 Call options at the $21.00 strike price for $.45 per share to continue the Range Resources Covered Calls position.

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


Range Resources Corp. (RRC) -- Continuation 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.
08/18/2017 5 RRC Aug 18, 2017 Call options expired
Note: price of RRC was $17.92 upon options expiration
09/27/2017 Sold 5 RRC October 20th, 2017 $21.00 Call options @ $.45 per share
Note: the price of RRC stock was $20.03 today when the Oct 20th Call options were sold

A possible overall performance result (including commissions) would be as follows:
Cost Basis of 500 shares of RRC: $10,204.95
= ($21.65 - $1.25)*500 shares + $4.95 commission

Net Profit:
(a) Options Income: +$838.35
= ($1.25 + $.45) *500 shares - $11.65 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $21.00 strike price at Oct 20th expiration): -$329.95
= ($21.00-$21.65)*500 shares - $4.95 commissions

Total Net Profit (If RRC is above $21.00 strike price at Oct 20th, 2017 options expiration): +$508.40
= (+$838.35 options income +$0.00 dividends -$329.95 capital appreciation)

Absolute Return: +5.0%
= +$508.40/$10,204.95
Annualized Return: +21.1%
= (+$508.40/$10,204.95)*(365/86 days)

Monday, September 25, 2017

Established Covered Calls in Alibaba Group Holding Ltd.

Today, the Covered Calls Advisor established a new Covered Calls position in Alibaba Group Holding Ltd. (ticker symbol BABA) with 26 days remaining until the October 20th, 2017 options expiration date.  This position is a relatively conservative one since it was established today when the price of Alibaba was $169.05 (5.4% downside protection to the $160.00 strike price).  This strike price is -0.68 standard deviations from the current stock price.  Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.  

For Alibaba, the chart below (click on the chart to view a larger and more legible version) shows that the potential annualized return of +18.4% for this Covered Calls position is preferable to the +16.8% to establish a comparable 100% Cash-Secured Puts position. 

The implied volatility of the Call options was 30.3 when this position was established and the open interest was 20,811 contracts  

The downside 'breakeven price' at expiration is at $157.90 ($169.05 - $11.15), which is 6.6% below the current market price of $169.05.  

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 20th, 2017 options expiration) for this position is 76.1%. 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 76.1%, the expected value for the annualized return-on-investment (if held until expiration) is +14.0% (+18.4% maximum potential annualized return on investment * 76.1%), an attractive risk/reward profile for this conservative investment.  

Finally, the 'crossover price' at expiration is $180.20 ($169.05 + $11.15).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Oct. 20th options expiration date rather than establishing this Covered Calls position.

Friday, September 15, 2017

September 2017 Options Expiration Results

 The Covered Calls Advisor Portfolio had eight Covered Calls positions with September 15th, 2017 options expirations.  Every position  closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions:
  • Alibaba Group Holding Ltd.:  +3.15% absolute return (+31.9% annualized return) in 36 days
  • Applied Materials Inc.:  +2.1% absolute return (+35.1% annualized return) in 22 days  
  • Bank of America Corp.: +1.3% absolute return (+13.2% annualized return) in 37 days
  • Delta Air Lines Inc. (position #1): +1.0% absolute return (+7.8% annualized return) in 45 days
  • Delta Air Lines Inc. (position #2): +2.3% absolute return (+21.9% annualized return) in 37 days
  • Micron Technology Inc.+2.1% absolute return (+29.3% annualized return) in 26 days
  • Tenneco Inc.: +1.22% absolute return (+23.4% annualized return) in 19 days
  • Voya Financial Inc.+1.7% absolute return (+23.5% annualized return) in 26 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these 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.  



Thursday, September 14, 2017

Continuation of Covered Calls Position in Devon Energy Corp.

Upon the August 18th, 2017 options expiration, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $35.00 strike price.  So, the August Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when Devon stock had risen to $34.12, a sell-to-open order was executed to sell 5 October 20th, 2017 Call options at the $35.00 strike price for $.89 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
08/18/2017 5 DVN Call options expired
Note: the price of DVN stock was $30.40 upon expiration of the Aug 18th Call options
09/14/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
09/14/2017 Sold 5 DVN October 20th, 2017 $35.00 Call options @ $.89 per share
Note: the price of DVN stock was $34.12 today when the Oct 20th Call options were sold

A possible overall performance result (including commissions) would be as follows:
Cost Basis of Purchase of 500 shares DVN: $17,679.95
= ($37.45 - $2.10)*500 + $4.95 commission

Net Profit:
(a) Options Income: +$2,241.60
= ($2.10 + $.87 + $.65 + $.89) *500 shares - 4*$3.35 commissions
(b) Dividend Income: +$60.00
= ($.06 + $.06) * 500 shares
(c) Capital Appreciation (If DVN is above $35.00 strike price at Oct 20th, 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 Oct 20, 2017 options expiration): +$1,017.65
= (+$2,241.60 options income +$60.00 dividends -$1,229.95 capital appreciation)

Absolute Return: +5.8%
= +$1,017.65/$17,679.95
Annualized Return: +14.2%
= (+$1,017.65/$17,679.95)*(365/148 days)

Friday, September 8, 2017

Early Assignment of MGM Resorts International Covered Calls

This morning the Covered Calls Advisor received email, phone mail, and text notifications from my broker (Schwab) that the 7 MGM Resorts International (ticker symbol MGM) September 15th, 2017 Call options were exercised early, so the 700 shares of MGM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $30.00 strike price. 

Early exercise by the owners of these Call options was plausible since there was only $0.04 per share [$4.03 midpoint of Call options bid/ask price - ($33.99 current stock price - $30.00 strike price)] time value remaining in these Call options.  So the Call owners were willing to immediately forego the remaining $0.04 per share time value by exercising their option to buy the shares (in order to capture today's $0.11 per share ex-dividend).  The per share stock price had increased from $31.56 when this MGM position was originally established on August 28th to $33.99 at yesterday's market close.

The Covered Calls Advisor preferred this early assignment outcome instead of keeping the Covered Calls position and capturing the $0.11 per share ex-dividend today since this early assignment resulted in higher annualized return-on-investment (+27.1% achieved) rather than if the position had instead been assigned on the September 15th options expiration date; which (including the $0.11 per share dividend) would have resulted in a +22.8% annualized ROI. Using the Dividend Capture Strategy spreadsheet has been working nicely recently.  In addition to this MGM position, recent early assignments in Kohl's, Intel, and JPMorgan Chase Covered Calls positions have achieved nice return-on-investment results. 

As detailed below, the actual return-on-investment result achieved for this MGM position was a +0.8% absolute return (equivalent to +27.1% 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 transactions details of which will be posted on this blog site the same day they occur.


MGM Resorts International -- Covered Calls Position Closed by Early Assignment
The transactions were as follows:
08/28/2017  Bought 700 MGM Resorts International shares @ $31.56
08/28/2017 Sold 7 MGM Sept 15, 2017 $30.00 Call options @ $1.81 and the implied volatility of these options was 29.2 when this buy/write transaction was executed.
09/07/2017 Seven Call options exercised early (day prior to ex-dividend date); so stock assigned (sold) at $30.00 strike price.
Note: the price of MGM was $33.99 when these Calls were exercised

The overall performance result (including commissions) was as follows:
Cost Basis of 7 Covered Calls in MGM: $20,834.64
= ($31.56 -$1.81)*700 + $9.64 commissions

Components of Net Profit:
(a) Options Income: +$1,267.00
= ($1.81*700 shares)
(b) Dividend Income: $0.00
(c) Capital Appreciation: -$1,096.95
= ($30.00-$31.56)*700 shares - $4.95 commissions

Total Net Profit (MGM assigned early on day prior to Sept 8th ex-dividend date) : +$170.05
= (+$1,267.00 options income +$0.00 dividends - $1,096.95 capital appreciation)

Absolute Return: +0.8%
= +$170.05/$20,834.64
Equivalent Annualized Return: +27.1%
= (+$170.05/$20,834.64)*(365/11 days)



Tuesday, September 5, 2017

Covered Calls Position Established in Discover Financial Services

Today, a Covered Calls positions was established in Discover Financial Services (ticker symbol DFS).  This was established when the stock price was $58.46 and three October 20th, 2017 $57.50 Calls were sold at $2.36.   This is are relatively conservative position since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral, so Discover has 1.6% downside protection to the $57.50 strike price.

Discover is currently rated as a good value by many in the investment community.  Ratings by 24 analysts are: 9 Buys; 8 Outperforms; 6 Neutral; and 1 Underperform.  In addition, the current Discover Financial Services target price for some services I follow are well above its current $58.46 price: S&P -- $73; Argus -- $74; and Credit Suisse -- $82. 

As detailed below, the potential return-on-investment is +2.5% absolute return in 46 days (equivalent to a +19.6% annualized return-on-investment).  


Discover Financial Services (DFS) -- New Covered Calls Position
The implied volatility of the Call options was 21.7 when this position was established.
The transactions were as follows:
09/05/2017 Bought 300 shares of Discover Financial Services @ $58.46 
09/05/2017 Sold 3 DFS October 20th, 2017 $57.50 Call options @ $2.36
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,836.96
= ($58.46 - $2.36)* 300 shares + $6.96 commission

Net Profit:
(a) Options Income: +$708.00
= ($2.36* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DFS is above $57.50 strike price at Oct 20th expiration): -$292.95
= ($57.50 -$58.46)* 300 shares - $4.95 commission

Total Net Profit (If Discover stock price is above $57.50 strike price at Oct 20th options expiration): +$415.05
= (+$708.00 options income +$0.00 dividend income -$292.95 capital appreciation)

Absolute Return: +2.5%
= +$415.05/$16,836.96
Annualized Return: +19.6%
= (+$415.05/$16,836.96)*(365/46 days)

The downside 'breakeven price' at expiration is at $56.10 ($58.46 - $2.36), which is 4.0% below the current market price of $58.46.

The probability of making a profit (if held until the October 20th, 2017 options expiration) for this Discover Financial Services Covered Calls position is 59.0%. This compares with a probability of profit of 50.2% for a buy-and-hold of Discover shares over the same time period. Using this probability of profit of 59.0%, the expected value annualized return-on-investment (if held until expiration) is +11.6% (+19.6% * 59.0%).  

The 'crossover price' at expiration is $60.82 ($58.46 + $2.36).  This is the price above which it would have been more profitable to simply buy-and-hold Discover Financial Services stock until the October 20th, 2017 options expiration date.

Covered Calls Established for JPMorgan Chase & Co., Las Vegas Sands Corp., and Western Digital Corp.

Today, three Covered Calls positions were established in JPMorgan Chase & Co. (ticker symbol JPM),  Las Vegas Sands Corp. (LVS),  and Western Digital Corp. (WDC).  The October 20th, 2017 options expiration was chosen for all three positions.  Given the Covered Calls Advisor's current cautious overall market outlook, moderately in-the-money Covered Calls positions were established in each instance. Also, there are upcoming ex-dividend dates prior to options expiration for all three companies and this is taken into consideration in the details presented below.

Some potential return-on-investment results for each position are:  
  • JPMorgan Chase & Co. -- A +2.6% absolute return in 46 days (equivalent to a +20.3% annualized return-on-investment if assigned at the October 20th expiration; or a +2.0% absolute return in 28 days (equivalent to a +25.7% annualized return if assigned the day prior to the October 3rd ex-dividend date).
  • Las Vegas Sands Corp. -- A +2.6% absolute return in 46 days (equivalent to a +20.8% annualized return-on-investment if assigned at expiration); or a +1.4% absolute return in 15 days (equivalent to a +33.9% annualized return if assigned the day prior to the September 20th ex-dividend date).  
  • Western Digital Corp. -- A +3.57% absolute return in 46 days (equivalent to a +28.3% annualized return-on-investment if assigned at expiration); or a +2.96% absolute return in 23 days (equivalent to a +47.0% annualized return if assigned the day prior to the September 28th ex-dividend date).
Detailed transactions and possible results for each position are provided below.
 
1. JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
An ex-dividend is expected to occur on October 3rd for $.50.  If the current time value (i.e. extrinsic value) of $1.73 [$3.49 option premium - ($89.26 stock price - $87.50 strike price)] remaining in the short Call options decays substantially (down to about $.15 or less) by October 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 300 JPM shares away to capture the dividend payment.

The transactions were:
09/05/2017 Bought 300 JPM shares @ $89.26
09/05/2017 Sold 3 JPM October 20th, 2017 $87.50 Call options @ $3.49
Note: a simultaneous buy/write transaction was executed.
10/03/2017 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 Basis: $25,735.95
= ($89.26 - $3.49) * 300 shares +$4.95 commission

Net Profit:
(a) Options Income: +$1,040.04
= ($3.49*300 shares) - $6.96 commissions
(b) Dividend Income (If option exercised early on Oct 2nd, the business day prior to Oct 3rd ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at October 20th, 2017 expiration): +$150.00
= ($.50 dividend per share x 300 shares)
(c) Capital Appreciation (If JPM assigned): -$532.95
+($87.50-$89.26)*300 - $4.95 commission

1. Total Net Profit [If option exercised on Oct 2nd (business day prior to Oct 3rd ex-dividend date)]: +$507.09
= (+$1,040.04 +$0.00 -$532.95); or
2. Total Net Profit (If JPM assigned at $87.50 at Oct 20, 2017 expiration): +$657.09
= (+$1,040.04 +$150.00 -$532.95)

1. Absolute Return [If option exercised on Oct 2nd, 2017 (business day prior to ex-dividend date)]: +2.0%
= +$507.09/$25,735.95
Annualized Return (If option exercised early): +25.7%
= (+$507.09/$25,735.95)*(365/28 days); or
2. Absolute Return (If JPM assigned at $87.50 at Oct 20th, 2017 expiration): +2.6%
= +$657.09/$25,735.95
Annualized Return (If JPM assigned at $82.50 at Jul2017 expiration): +20.3%
= (+$657.09/$25,735.95)*(365/46 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 $87.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $85.27 ($89.26 -$3.49 -$.50) provides 4.5% downside protection below today's $89.26 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, nine of the eleven criteria are achieved for this JPMorgan position.




2. Las Vegas Sands Corp (LVS) -- New Covered Calls Position
As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its synthetically equivalent short Cash-Secured Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position".  Las Vegas Sands next quarterly earnings report is after the October 20, 2017 options expiration date.
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 LVS 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 Las Vegas Sands.

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 Las Vegas Sands position.

For this position, the downside 'breakeven price' at expiration is at $58.43 ($61.90 - $2.74 -$.73), which is 5.6% below the current market price of $61.90. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 20th, 2017 options expiration) for this Las Vegas Sands Covered Calls position is 65.1%, so the expected value annualized ROI of this investment (if held until expiration) is +13.5% (+20.8% * 65.1%), a satisfactory result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $63.91 ($61.90 + $2.74 -$.73).  This is the price above which it would have been more profitable to simply buy-and-hold LVS stock until October 20th (the October monthly options expiration date) rather than establishing this Covered Calls position.



3. Western Digital Corporation (WDC) -- New Covered Calls Position
The $.50 ex-dividend upcoming on September 28th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $2.47 [$6.32 option premium - ($88.85 stock price - $85.00 strike price)] remaining in the short Call options decay well below (probably about $.10 or less) the upcoming $.50 dividend payment by Sept 27th (the business day prior to the ex-div date), then it is possible that the Call options owner would exercise early and call the Western Digital shares away to capture the dividend.

As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its synthetically equivalent short Cash-Secured Put options position in this instance:


In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $85.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $82.03 ($88.85 -$6.32 -$.50) provides 7.7% downside protection below today's $88.85 purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a 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 Western Digital Corporation position, all eleven criteria were achieved.




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Please feel free to 'Comment' below or email me at the address shown in the upper right sidebar of this blog with any comments or questions.

Monday, September 4, 2017

Understanding the Terms 'Exercise' and 'Assignment'

Options related investing can be complex, especially compared to a basic buy-and-hold strategy.  Because of this complexity, it is especially important to be precise in the words we choose to explain ourselves.  But my observation over the years has been that clarity when a commentator on CNBC describes an options position he/she has taken is more often than not woefully inadequate.  A typical example is a comment like "I sold some Calls on Amazon today."  How frustrating!  This comment gives us virtually no useful information, not even if the analyst is bullish or bearish on the stock.  At a minimum they should say whether (1) the Calls were established at-the-money, in-the-money, or out-of-the-money; and (2) whether they are Naked Calls, Covered Calls, or some form of options spread transaction being established in conjunction with existing options in the same stock.    Ideally they should say something like "Today I established an out-of-the-money Covered Calls position in Amazon at the $980 strike for the September 15th expiration.  This will yield a 28% annualized return if assigned at expiration."    

One area where I have noticed substantial confusion is the difference between the term 'exercise' and the term 'assignment'.  To be honest, over the years I have often, incorrectly, used these two words interchangeably.

Whenever I seek clarity on the meaning of a particular investing-related concept, I first go to a wonderful site that is basically a dictionary of investing words and terminology -- investopedia.com. 
Before reading the sentences about the terms 'exercise' and 'assignment' from Investopedia presented below, here is a basic background insight to help you distinguish the primary difference between these two terms:
  1. Exercising an option is done by the option buyer (i.e. the owner of the option).
  2. Assignment occurs to the option seller (as a direct result of the option buyer's exercise).


Explanations from Investopedia
  • Exercise:
In options trading, the buyer (or holder) of a call contract may exercise his or her right to buy the underlying shares at the specified price (the strike price); the buyer of a put contract may exercise his or her right to sell the underlying shares at the agreed-upon price. If the buyer chooses to exercise the option, he or she must inform the option seller (the writer of the option contract). This is achieved through an exercise notice, the broker's notification that a client wishes to exercise his or her right to buy or sell the underlying security. The exercise notice is forwarded to the option seller via the Options Clearing Corporation. Even though the buyer has the right but not the obligation to exercise the option, the seller is obligated to fulfill the terms of the contract if the buyer decides to exercise the option.

  • Assignment:
"Assignment" is the designation by a clearinghouse of an option writer who will be required to buy (in the case of a put) or sell (in the case of a call) the underlying futures contract or security when an option has been exercised, especially if it has been exercised early.


How do these terms apply to Covered Calls?
Example #1: If we own a Covered Calls position where the stock price is in-the-money (stock price above the strike price) at market close on the options expiration date, then we are are 'assigned' so that we are required to sell the long stock position underlying the short Call options held.  At this point, both the long stock and short Call options positions are liquidated to cash. 
Example #2: Again, we own a Covered Calls position.  We are short Call options.  But remember, for every Call option sold, that same Call option has been bought by someone else.  The Call option buyer (owner) has the right to sell his option on the open market at any time.  But instead of simply selling his option, he/she can instead 'exercise' their Call option, meaning they have decided to buy the associated shares in the stock from someone who is short the same Call option.  Note: a Call option owner is only incentivized to 'exercise' their option on either: (1) the day prior to an ex-dividend date; if the option is deep in-the-money so the time value remaining in the option is much less than the ex-dividend amount (for example, an ex-div of $.50 when the remaining time value is $.05 or less); or (2) only a few days prior to the options expiration date and the option is deep in-the-money such that the remaining time value in the option is very small (normally $.10 or less) relative to the price of the stock. 

These two examples demonstrate what I mean in the first sentence above that: "Options related investing can be complex."


Here's a short mental exercise to check your own understanding of these two terms:
As we know, Covered Calls and Cash-Secured Puts are synthetically equivalent positions when done at the same strike price for the same expiration date.  So, think through how the terms 'exercised' and 'assigned' are used when describing actions resulting from a short Cash-Secured Puts position.
Be patient in doing this because correct use of these two terms is definitely not easy to master.

I hope this blog post has been helpful.  As always, your comments or questions are welcomed.
Please 'Comment' at the link below or, if you prefer, email me at the address shown on the upper right sidebar of this blog.

Best Regards and Godspeed,
Jeff  

Saturday, September 2, 2017

Continuation of Delta Air Lines Inc. Covered Calls Position

This is the first of two Covered Calls positions in Delta Air Lines Inc. in the Covered Calls Advisor Portfolio.  The initial position expired at the August 18th, 2017 options expiration.  Yesterday afternoon, a continuation of this position was established by selling 5 Sept 15, 2017 $48.00 Calls at $.66 per share.  The original Aug2017 position closed with the Delta stock price below the breakeven price, so this Sept 15th position is an attempt to repair the losses from the original investment and to salvage a small profit by the Sept 15th expiration date.  A potential result for this Delta position is for a +1.0% absolute return over 45 days (equivalent to a +7.8% annualized return-on-investment) if Delta closes above the $48.00 strike price on September 15th.   


Delta Air Lines Inc. (DAL) -- Continuation of Covered Calls Position
The transactions were as follows:
08/01/2017  Bought 500 Delta Air Lines Inc. shares @ $49.97
08/01/2017 Sold 5 DAL Aug 18, 2017 $49.00 Call options @ $1.50
Note: this was a simultaneous buy/write transaction.
08/18/2017 5 DAL Call options expired with stock price below strike price 
08/21/2017 $.305 ex-dividend
09/01/2017 Sold 5 DAL Sept 15, 2017 $48.00 Call options @ $.66 to continue Delta Covered Calls position

A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares DAL: $24,243.30
= ($49.97 -$1.50)*500 + $8.30 commissions

Net Profit:
(a) Options Income: +$1,071.70
= ($1.50 + $.66) *500 shares - $8.30 commission
(b) Dividend Income: +$152.50
= $.305 per share x 500 shares
(c) Capital Appreciation (If DAL is above $48.00 strike price at Sept 15th expiration): -$989.95
= ($48.00-$49.97)*500 shares - $4.95 commissions

Total Net Profit (If DAL is above $48.00 strike price at Sept 15, 2017 options expiration): +$234.25
= (+$1,071.70 options income +$152.50 dividends -$989.95 capital appreciation)

Absolute Return: +1.0%
= +$234.25/$24,243.30
Annualized Return: +7.8%
= (+$234.25/$24,243.30)*(365/45 days)

Friday, September 1, 2017

Early Assignment of Kohl's Corporation Covered Calls

This morning I received both email and text notifications from my broker (Schwab) that the 5 Kohl's Corporation (ticker symbol KSS) Call options were exercised early, so the 500 shares of Kohl's stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $35.00 strike price. 

Early exercise by the owners of these Call options was expected since there was no time value remaining in these options.  So the owners exercised their option to buy the shares in order to capture the $.55 per share dividend that goes ex-dividend today.  The per share price had increased from $37.02 when this position was originally established (on August 17th) to $39.23 at yesterday's market close. 

As detailed below, the actual return-on-investment result achieved for this Kohl's position was a +1.4% absolute return (equivalent to +37.0% annualized return) for the 14 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 they occur.


Kohl's Corporation (KSS) -- Covered Calls Position Closed
The transactions were as follows:
08/17/2017  Bought 500 Kohl's shares @ $37.02
08/17/2017 Sold 5 KSS Sept 15, 2017 $35.00 Call options @ $2.52
Note: this was a simultaneous buy/write transaction.
08/31/2017 Five Call options exercised early (day prior to ex-dividend date) and stock sold at $35.00 strike price.

The overall performance result (including commissions) for this Kohl's covered calls position was as follows:
Covered Calls Position Cost Basis: $17,258.30
= ($37.02 -$2.52)*500 + $8.30 commissions

Net Profit:
(a) Options Income: +$1,260.00
= ($2.52*500 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$1,014.95
= ($35.00-$37.02)*500 shares - $4.95 commissions

Total Net Profit: +$245.05
= (+$1,260.00 options income +$0.00 dividends -$1,014.95 capital appreciation)

Absolute Return: +1.4%
= +$245.05/$17,258.30
Annualized Return: +37.0%
= (+$245.05/$17,258.30)*(365/14 days)