This trade setup is a Covered Call strategy on PepsiCo, Inc. (PEP). Here's a breakdown of the trade:
1. Underlying Asset: The underlying asset for this trade is PepsiCo, Inc. (PEP). The last traded price of PEP is $187.53.
2. Covered Call Strategy: The strategy involves selling a call option while owning the underlying asset. This is known as a covered call strategy. The goal is to generate income (the premium received from selling the call) while potentially selling the stock if the price rises above the strike price.
3. Option Details: The call option being sold has a strike price of $190 and expires on August 4, 2023. This means that if PEP's price is above $190 on the expiration date, the option can be exercised, and you would have to sell your PepsiCo shares for $190 each. However, if you don't want to sell your shares and the price is above the strike price as the expiration date approaches, you have the option to "roll" your position. This involves buying back the current call option and selling another one with a later expiration date, and possibly a higher strike price. This can generate additional premium income and give the stock more time to potentially increase in value.
4. Premium: The premium received from selling the call option is $165. This is the income generated from the trade, which you get to keep regardless of what happens with PEP's price.
5. Breakeven Point: The breakeven point for this trade is $191.65. This is calculated as the strike price plus the premium received divided by the number of shares. If PEP's price is above this level at expiration, the trade will be at its maximum profit.
6. Risk: The maximum risk in a covered call strategy is if the stock price falls significantly. However, the premium received from selling the call option provides some downside protection.
7. Probability of Profit: The probability of making a profit on this trade, based on the delta of the option position, is 64.55%.
8. Delta and Theta: Delta is -0.3545, which means the option's price is expected to decrease by $0.3545 for each $1 increase in PEP's price. Theta is 0.0488, which means the option's price is expected to decrease by $0.0488 each day, all else being equal. These are measures of the option's sensitivity to changes in the stock price and time decay, respectively.
9. Calculating the yield:
The yield from the premium can be calculated as a return on the capital invested in the underlying shares. Here's how you can calculate it:
1. Capital Invested: The capital invested in the underlying shares is the price of the shares multiplied by the number of shares. In this case, it's 100 shares * $187.53/share = $18,753.
2. Income from Premium: The income from the premium is $165.
3. Yield: The yield is the income from the premium divided by the capital invested, expressed as a percentage. So, the yield is ($165 / $18,753) * 100 = 0.88%.
However, this is the yield for the 22-day period until the option's expiration. If you want to annualize this yield to compare it with other annual returns, you can do so as follows:
Annualized Yield: To annualize the yield, you first calculate the number of 22-day periods in a year, which is 365 / 22 = 16.59 periods. Then, you multiply the yield for one period by the number of periods in a year. So, the annualized yield is 0.88% * 16.59 = 14.6%.
So, the yield for this covered call strategy is 0.88% for the 22-day period, or 14.6% on an annualized basis.
- this is a simplified calculation and actual results can vary based on a variety of factors.
- selling covered calls can generate income, but it also caps your upside potential because you may have to sell your stock if its price rises above the strike price. It's important to be comfortable with this trade-off before implementing a covered call strategy.