1. Underlying Asset: The underlying asset for this trade is UBS Group (ticker: UBSG:xvtx). The price of UBSG at the moment of writing was CHF 21.870 (Tuesday, August 29, 2023).
2. Covered Call Strategy: The strategy involves selling a call option while owning the underlying asset, known as a covered call strategy. The goal is to generate income from 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 CHF 23 and expires on September 15th, 2023. This means that if UBS's price is above CHF 23 on the expiration date, the option can be exercised, and you would have to sell your UBS shares for CHF 23,- 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, which 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 CHF 0.33 per share or CHF 33,- per contract (which corresponds to 100 shares). This is the income generated from the trade, which you get to keep regardless of what happens with UBS's price.
5. Breakeven Point: The breakeven point for this trade is the stock price less the premium received. So, it's CHF 21.87 - CHF 0.33 = CHF 21.54. If UBS's price is above this level at expiration, the trade will be profitable.
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. Calculating the yield:
1. Capital invested: The capital invested in the underlying shares is the price of the shares multiplied by the number of shares. In the case of 1 call contract, it's 100 shares at CHF 21.870 each, so the capital invested is CHF 2187,-.
2. Yield: The yield is the premium received divided by the capital invested. In this case, it's CHF 33 / CHF 2187 = 1.51%.
However, this is the yield for the 17-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 17-day periods in a year, which is 365 / 17 = 21.47 periods. Then, you multiply the yield for one period by the number of periods in a year. So, the annualized yield is 1.51% * 21.47 = 32.92%.
So, the yield for this covered call strategy is 1.51% for the 17-day period, or 32.92% 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.
- If you possess a definitive outlook on the trajectory that UBS will take, initiating a trade before the earnings announcement could be a profitable move. This is due to the heightened implied volatility, which results in a higher premium to collect. However, if you're uncertain, it might be prudent to hold off until just after the earnings are released and then contemplate new strike levels. While you may lose some options value due to the volatility slump, if UBS experiences a significant "gap-up", you could find yourself in a more secure position.
2. Cash secured put