An idiot discusses call options III
Because Cenovus has been running a bit lately, these options have actually done nicely for me (afraid to show you some others, because they are down quite a bit).
What I’d like to illustrate here is the premium I’m paying for the luxury of more time to meet my strike price of $30.
If CVE were to hit $35 in December 2022 and stay there through January 2024:
The Jan 20 2023 would generate a profit of $4,924.70 for an 856.0% return. How? Let’s see:
No. of options: 11 (1,100 shares)
Strike price: $30
Premium per share: $0.51 ($561.00 on 1,100 shares)
Commission per option: $1.30 ($14.30 on 11 options)
Closing price 02-DEC-2022: $35
Profit per option = $35 closing price * 100 - $30 strike price * 100 - $0.51 premium * 100 - $1.30 Commission =
$3,500 - $3,000 - $51 - $1.30 = $447.70 profit per option
Multiply by 11 for all the options purchased, and you invested $557.47 and walked away with $4,924.70 more than that initial investment.
Using same method for the remaining options:
Jun 16 2023 = 388.8% return ($3,977.00 profit vs. investment of $1,006.79)
Jan 19 2024 = 183.6% return ($3,237.00 profit vs. investment of $1,746.79)
If CVE stayed under $30 through June 2023, the first two sets of call options would be worthless.
In such a case, in order to break even, by January 2024, CVE would have to rise to a price that would pay for the $3,311.05 paid in premia.
Because 10 call options are good through that time, all we have to do is divide the total premia paid by 1,000 (10 calls = 1,000 shares), to get our break-even price of $33.32 (3,311.05/1000, $3.3105 which rounds up to $3.32).
A lot of people people like CVE call options because of the company’s negligible dividend. Call option owners do not receive dividends paid by the underlying company held. This is a potential risk when using calls with companies such as CNQ or SU that pay higher dividends. As many have noted, companies frequently drop in value commensurate with dividends paid out as we approach each ex-dividend date.
Of course, if CVE were to deliver a good quarter, and announce that it was tripling the dividend, the underlying shares would increase in value as more investors moved into the stock, and the price of these CVE options will show a corresponding increase in value.
Thanks for reading!