This article appeared first on enhanced-investing.com(on July 9, 2019)
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On April 10 of this year (2019), I was assigned 100 shares of CVS at a
price of $60 per share. The Short April Put , strike 60, that caused
this assignment had been originally sold for a $62 credit.
Ideally when an assignment happens, the price of the stock will be
near your short option strike price, so that your open losses don’t look
ugly. More importantly so that you can sell Out of the Money Calls that
not only give you additional credit, but which are also above your
shares assignment price, so that you can make capital gains too on a
rebound of the stock.
That wasn’t the case, unfortunately with CVS.
CVS stock price has been significantly below 60. Even hitting a low of $51.72 on May 17
I thought CVS at $60 was undervalued and unlikely to go much lower
down. This just shows you that you need to always be prepared for
anything. At a time when respected rating sources (such as MorningStar
and Finviz) were giving a fair value in the high 80’s to the stock, this
sudden collapse happens. Anything can happen at any time.
Now, let’s see what has happened since then:
3 Covered Calls successfully closed for a total profit of $65 1 Dividend payment of $0.50 per share. That’s $50 more. And don’t forget the original Put, for which a credit of $62 was obtained.
The grand total of all those credits is $177. And this is in 85 days
(April 10 to July 4 day of this writing). The invested capital is $6000.
Therefore, this is a +2.95% return on that capital for now. But that’s
only in 85 days. If we “annualize it”, it projects a +12.7% return for
the year at this pace. Not ground breaking, but a decent return on
capital.
Now, if we also take into consideration that this is a margin account
with 2:1 leverage, the invested capital is $3000 (and not $6000).
Therefore, the annualized return on that capital is +25.4% and this is a
very decent return.
Of course, the above number is only considering the options premiums
and the dividends. The final ingredient in the equation is the capital
appreciation (or loss if CVS never recovers beyond $60).
The point is, over a period of an entire year, if we do get to
collect enough credits and dividend for a 12.7% return on capital, then
the stock would only need to be at around $52.40 (from the assignment
price of $60) for me to break even as a whole. Anything above that
number on April 10, 2020 (1 year after the assignment) would mean that I
haven’t lost money overall even though the stock is still significantly
down from the assignment level and more than 45% down from the November
2018 highs above $82.
And that’s what I like about Enhanced Investing. It won’t typically
give you home-runs, but it provides a great defensive framework to fight
and improve your positions overtime, effectively limiting the damage
more and more as time goes by.
If you enjoyed this content, consider acquiring the Enhanced Investing Course.
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