Just was assigned MRO, now what?

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There is an earlier update from Sunday, March 4th, that can be found here:  https://greekgodtrading.blogspot.com/2018/03/march-3rd-csp-and-cc-weekend-update.html   

That update provides the weekend overview that I normally do -- this entry is focused on the analysis of MRO.

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MRO

I was just assigned MRO as of the close on 3/2; now what?

First, let's look at the accounting that got me here:

• MRO 180302P15 was sold on 2/26 and I collected $16 per contract at $1 commission per contract, for a total of ($16-$1) * 3 contracts = $45 total.  MRO closed at $14.86 on 3/2, below my strike, so 300 shares were put to me.  The duration was 5 days, inclusive of start/ending dates.  ROO was $45/4500 = 1% and AROO was 1% * 365 / 5 = 73%.  My new basis for the stock is $15.00 - $0.15 = $14.85, inclusive of commissions.

Step 2:  Has my position changed on whether I should own MRO?

• ER:  MRO does not report earnings until 5/16, after the close.  This is far in the future, so no worries.
• Dividends:  MRO went ex-Div on 2/20.  This is prior to ownership of both the put option as well as shares, so nothing here to consider.
• Earnings:  MRO could be getting into trouble here, as a number of analysts are predicting a bumpy road ahead.  See here and here.  If there was a reason not to hold onto MRO, this is it.
• Revenues:  MRO looks like it will continue to have solid revenue numbers on both a QoQ and YoY basis.  See here.
• Price:  As I write this, the close on Friday 3/2 at $14.86 was -15.2% below the 50-day MA.  The 200d MA < 150d MA < 50d MA, which is a long-term uptrend on the stock.  I note that the 100d EMA < 50d EMA, which is shorter-term bullish, but the trend on the 50d EMA and 100d EMA are both downward, which is ominous.  See the chart that follows:

Click on the image to enlarge.

The chart shows the following additional price info:

1. The RSI is in oversold territory.  This suggests a move upward, but of course, we do not know when.  We could continue lower at this pace and RSI would remain at these low levels, indicating that a turn around is just around the corner, when it is not.  
2. We are walking down the lower Keltner channel.  Generally this is a bullish indicator, but you can see that we are not making new highs but are continuing to make lower lows.  This too suggests a move upward at any time, but right now the trend is downward.
3. The Know Sure Thing (KST) lines are starting to converge, and when the black line intersects the red line from below, we'll have some confidence of being bullish in MRO.

Answer to Step 2:  No, I am still bullish on MRO, but not across earnings.  It appears that their next ER will be negative, so I'll want to be clear of the stock by then.  Everything else suggests that the downtrend is abating and we could turn upwards at any time.

Step 3:  Selecting the CC

Much of this is moot -- I was put the stock and now I own 300 shares at a $14.85 cost basis.  We are about to move higher, but we are early.  It makes sense to shorten the outlook and since we have weekly options available, keeping the time short to sell calls is a good objective.

Let's look at ITM --> ATM --> OTM calls for 3/9.  Here are the probabilities of MRO being above/below a certain dollar amount on 3/9:

Click on the image to enlarge.

• ITM:  The in-the-money call for MRO (MRO 180309C14.5, open interest 24 contracts) has a bid/ask of $0.56/0.60, so the likely fill would be $0.57 and including commissions, $0.56.  The ROO would be $56/1485 = 3.78% and the AROO would be 3.78% * 365 / 5 days to expiration = 275%.  The new cost basis would be $14.85 - $0.56 = $14.29.  If called away (almost guaranteed), I would make ($14.50 - $14.29) = 0.21, so the total return on the chain would be 21/1429 = 1.47%.  Because the chain started on 2/26 and could end on 3/09 this is 12 days, inclusive of starting and ending dates, and the annualized return would be 1.47% * 365 / 12 = 44.7%.  The chance of being called away (measured from 3/4) is 70%.

• ATM:  The at-the-money call for MRO (MRO 180309C15, open interest 274 contracts) has a bid/ask of $0.28/0.31, so the likely fill would be $0.29, and including commissions, $0.28.  The ROO would be $28/1485 = 1.89% and the AROO would be 1.89% * 365 / 5 days to expiration = 138%.  The new cost basis would be $14.85 - $0.28 = $14.57.  If called away, I would make ($15 - $14.57) = 0.43, so the total return on the chain would be 43/1457 = 2.95%.  Because the chain started on 2/26 and could end on 3/09 this is 12 days, inclusive of starting and ending dates, and the annualized return would be 2.95% * 365 / 12 = 89%.  The chance of being called away (measured from 3/4) is 42%.

• OTM:  Let's look at the 15.50 call (MRO 180309C15.5, open interest 243 contracts), which has a bid/ask of $0.11/0.14 and would provide a likely fill at $0.12.  Including commissions this would drop to $0.11.  The ROO would be $11/1485 = 0.74% and the AROO would be 0.74% * 365 / 5 = 54%.  The new cost basis would drop to $14.85 - $0.11 = $14.74, inclusive of commissions.  If called away, I would make ($15.50 - $14.74) = $0.76, so the total return on the chain would be 76/1474 = 5.16%, and the annualized return would be 5.16% * 365 / 12 = 157%.  I note that the table above suggests that there is only an 18% chance of this occurring (measured from 3/4) so I would have to be content with making the ROO of 0.74%, lowering the basis to $14.74, and achieving a 54% AROO on the leg.

While I'm here, let's look at the 16 call (MRO 180309C16), which has a bid/ask of $0.04/0.06 and would most likely fill at $0.04 (maybe 0.05, but midpoints are rarely taken).  With commission this would drop to $0.03.  The ROO would be $3/1485 = 0.2% and the AROO would be 0.2% * 365 / 5 = 14.8%.  This is getting into my minimum AROO that I will take on a position -- 12% to 24%, so I'd rather not go here.

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Often, buying in the same week leaves some money on the table.  Let's do the same analysis with the 3/16 OE:

Here are the probabilities of being above/below a given strike, using 40% historical volatility and 12 days to expiration:

Click on the image to enlarge.

• DEEP ITM:  The in-the-money call for MRO (MRO 180316C14, open interest 254 contracts) has a bid/ask of $1.04/1.09, so the likely fill would be $1.06 and including commissions, $1.05.  The ROO would be $105/1485 = 7.07% and the AROO would be 7.07% * 365 / 12 days to expiration = 215%.  The new cost basis would be $14.85 - $1.06 = $13.79.  If called away (almost guaranteed), I would make ($14 - $13.79) = 0.21, so the total return on the chain would be 21/1379 = 1.52%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 1.52% * 365 / 19 = 29.3%.  The chance of being called away (measured from 3/4) is 79%.

• ITM:  The in-the-money call for MRO (MRO 180316C14.5, open interest 459 contracts) has a bid/ask of $0.70/0.75 so the likely fill would be $0.72 and including commissions, $0.71.  The ROO would be $71/1485 = 4.78% and the AROO would be 4.78% * 365 / 12 days to expiration = 145%.  The new cost basis would be $14.85 - $0.71 = $14.14.  If called away (probable), I would make ($14.50 - $14.14) = 0.36, so the total return on the chain would be 36/1414 = 2.55%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 2.55% * 365 / 19 = 48.9%.  The chance of being called away (measured from 3/4) is 63%.

• ATM:  The at-the-money call for MRO (MRO 180316C15, open interest 3,374 contracts) has a bid/ask of $0.43/0.46, so the likely fill would be $0.44, and including commissions, $0.43.  The ROO would be $43/1485 = 2.90% and the AROO would be 2.90% * 365 / 12 days to expiration = 88%.  The new cost basis would be $14.85 - $0.43 = $14.42.  If called away, I would make ($15 - $14.42) = 0.58, so the total return on the chain would be 58/1442 = 4.02%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 4.02% * 365 / 19 = 77%.  The chance of being called away (measured from 3/4) is 44%.

• OTM:  Let's look at the 15.50 call (MRO 180316C15.5, open interest 935 contracts), which has a bid/ask of $0.24/0.25 and would provide a likely fill at $0.24.  Including commissions this would drop to $0.23.  The ROO would be $23/1485 = 1.55% and the AROO would be 1.55% * 365 / 12 = 47%.  The new cost basis would drop to $14.85 - $0.23 = $14.62, inclusive of commissions.  If called away, I would make ($15.50 - $14.62) = $0.88, so the total return on the chain would be 88/1462 = 6.02%, and the annualized return would be 6.02% * 365 / 19 = 116%.  The chance of being called away is 28%, measured from 3/4.

• DEEP OTM:  Let's look at the 16 call (MRO 180316C6, open interest 1679 contracts), which has a bid/ask of $0.12/0.13 and would provide a likely fill at $0.12.  Including commissions this would drop to $0.11.  The ROO would be $11/1485 = 0.74% and the AROO would be 0.74% * 365 / 12 = 22%.  The new cost basis would drop to $14.85 - $0.11 = $14.74, inclusive of commissions.  If called away, I would make ($16 - $14.74) = $1.26, so the total return on the chain would be 126/1474 = 8.55%, and the annualized return would be 8.55% * 365 / 19 = 164%.  The chance of being called away is 15%, measured from 3/4.

Summary with the 3/16 OE:

• MRO 180316C14:  ROO:  7.07%, AROO: 215%, New Basis if NOT Called: $13.79, Chance of Being Called:  79%, Overall return on entire chain if called: 1.52%, Annualized return on entire chain if called:  29.3%
• MRO 180316C14.5:  ROO:  4.78%, AROO: 145%, New Basis if NOT Called: $14.14, Chance of Being Called:  63%, Overall return on entire chain if called:  2.55%, Annualized return on entire chain if called:  48.9%
• MRO 180316C15:  ROO:  2.90%, AROO: 88%, New Basis if NOT Called: $14.42, Chance of Being Called:  44%, Overall return on entire chain:  4.02%, Annualized return on entire chain if called:  77%
• MRO 180316C15.5:  ROO:  1.55%, AROO: 47%, New Basis if NOT Called: $14.62, Chance of Being Called:  28%, Overall return on entire chain if called:  6.02%, Annualized return on entire chain if called:  117%
• MRO 180316C16:  ROO:  0.74%, AROO: 22%, New Basis if NOT Called: $14.74, Chance of Being Called:  15%, Overall return on entire chain if called:  8.55%, Annualized return on entire chain if called:  164%

Summary with the 3/9 OE:

• MRO 180309C14.5:  ROO:  3.78%, AROO 275%, New Basis if NOT Called: $14.29, Chance of Being Called:  70%, Overall return on entire chain if called:  1.47%, Annualized return on entire chain if called: 44.7%
• MRO 180309C15:  ROO:  1.89%, AROO 138%, New Basis if NOT Called: $14.57, Chance of Being Called:  42%, Overall return on entire chain if called:  2.95%, Annualized return on entire chain if called: 89%
• MRO 180309C15.5:  ROO:  0.74%, AROO 54%, New Basis if NOT Called: $14.74, Chance of Being Called:  18%, Overall return on entire chain if called:  5.16%, Annualized return on entire chain if called: 157%

Discussion of Strike Selection of Tradeoffs:

• In general, selling the ITM strike may benefit me in the short term with the higher ROO on the leg, but the entire chain return is lower because the spread between the lower basis and the call strike limits the overall gains (sell put -> put stock -> sell call -> called away = chain).  That's not my goal.  My goal is to maximize the overall gains from the entire chain, because the money is tied up and it needs to be working hard from the moment the initial put is sold to when the stock is called away.
• The flip side of this is that it is not a bad goal to have the call expire worthless (e.g. stock price closes below the call strike) and then sell a new call.  The continued lowering of the basis every time this occurs is another desired outcome, because when the stock is finally called away, the maximum profit occurs between the basis and the strike price.  Hence, lowering the basis of the chain is a major goal too.
• Take a look at the ATM calls for both 3/9 and 3/16.  Both have roughly the same probability of being ITM at options expiration (44% for the 3/16 vs 42% for the 3/9).  I note the following when looking at these two:
  
  a)  The cost basis is lower for the March 16 $15 call than for the March 9th.  If the stock is not called away, this will matter.  This points to selling the March 16 OE series.
  
  b) The ROO for the option leg is higher for the March 16th $15 call:  4.78% vs. 1.89%.  This makes sense, since going out in time generally results in collecting more premium.  This too points me to the March 16 OE series.
  
  c) if the stock is called away, I'm better off from the "entire chain" perspective with the March 16th $15 call than with the March 9th.  The difference is 4.02% vs. 2.95%, but because of the time portion that the money is tied up, the 3/9 OE has better annualized numbers (12 days vs. 19 days).  We put dollars in the bank, not annualized numbers, so for me, collecting over 1% more for the same risk is more attractive.  This points me to the March 16 OE series.
• Personally, I like probabilities that are 30% or less of being ITM at OE.  This suggests that the March 16 15.50 call or the March 16 16.00 call are my candidates.  The 15.50 call has the lower cost basis if NOT called ($14.61 vs. $14.74), which is one of my goals, so this is what I'm selling:

STO 3 MRO 180316C15.5 limit 0.24 GTC.

As always, this is NOT a recommendation for you.  It's what *I* am going to do.  Your individual situation may be very different from mine and this could be a rabbit hole in your universe.

Final Analysis on MRO 180316C15.5 limit 0.24

If the sale goes through and I'm filled at $0.24 my basis will be lowered by ($0.24 - $0.01 commission) = $0.23, which will be $14.85 - $0.23 = $14.62.  

Case 1:  Stock is below $15.50 at OE.  The option expires worthless and my new basis remains $14.62.  Time to sell another call.

Case 2:  Stock is above $15.50 at OE.  The stock will be called and my profit will be $15.50 - $14.62 = $0.88, inclusive of commissions.  The total return on the chain would be 88/1462 = 6.02%, and the annualized return would be 6.02% * 365 / 19 = 116%.

Here's the profit/loss chart:

Click on the image to enlarge.

Note that there are 3 contracts being sold because I have 300 shares of MRO.  

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If you see anything wrong in my calculations, please let me know.  I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing I've written here is to be considered investment/trading advice -- it is only provided for educational purposes.

Regards,

pgd