Established Covered Calls Position in Intel Corp. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Intel Corp. (ticker symbol INTC) with an August 18, 2017 expiration and at the $34.00 strike price.  This position has an upcoming quarterly ex-dividend on August 3rd of $.2725 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the Aug 18th options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its comparable short Put options position in this instance:

You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "YES*" with an indication that "If 'YES' then consider avoiding position".  Intel does have a quarterly earnings report prior to the options expiration.  In fact, they will report after the market close tomorrow.  I decided to go forward and establish this position because semiconductor manufacturers Texas Instruments and Advanced Micro Devices (same industry as Intel) released their quarterly report yesterday.  Both companies beat analysts' revenue and earnings estimates and they guided next quarter higher than previous guidance -- and their stocks moved higher as a result.  I expect similar good results from Intel.

Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that Intel will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a covered calls position for Intel. The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, ten of the eleven criteria are achieved for this Intel Corp. position.

Details for this position as well as possible return-on-investment outcomes are provided below.

Intel Corp. -- Covered Calls Position Established
An ex-dividend occurs on August 3rd for $.2725.  If the current time value (i.e. extrinsic value) of $.40 [$1.05 option premium - ($34.65 stock price - $34.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by August 2nd (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 600 Intel shares away to capture the dividend payment.

The transactions were:
07/26/2017 Bought 600 INTC shares @ $34.65
07/26/2017 Sold 6 INTC Aug 18, 2017 $34.00 Call options @ $1.05
Note: a simultaneous buy/write transaction was executed.
08/03/2017 Upcoming quarterly ex-dividend of $.2725 per share

Two possible overall performance results (including commissions) for this Intel covered calls position are as follows:
Stock Purchase Cost: $20,794.95
= ($34.65*600+$4.95 commission)

Net Profit:
(a) Options Income: +$626.10
= ($1.05*600 shares) - $3.90 commissions
(b) Dividend Income (If option exercised early on August 2nd, the business day prior to ex-div date): +$0.00; or
(b) Dividend Income (If INTC assigned at Aug 18th, 2017 expiration): +$163.50
= ($.2725 dividend per share x 600 shares)

(c) Capital Appreciation (If INTC assigned early): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions; or
(c) Capital Appreciation (If INTC assigned at $34.00 strike price at Aug 18th options expiration): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions

1. Total Net Profit [If option exercised early]: +$231.15

= (+$626.10 options income +$0.00 dividend income -$394.95 capital appreciation); or

2. Total Net Profit (If INTC assigned at $34.00 at expiration): +$394.65

= (+$626.10 options income +$163.50 dividend income -$394.95 capital appreciation)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.11%

= +$231.15/$20,794.95

Annualized Return (If option exercised early): +50.7%

= (+$231.15/$20,794.95)*(365/8 days); or

2. Absolute Return (If INTC assigned at $34.00 on August 18, 2017 expiration date): +1.90%

= +$394.65/$20,794.95

Annualized Return (If INTC assigned at $34.00 on August 18th options expiration date): +28.9%

= (+$394.65/$20,794.95)*(365/24 days)

Early assignment is preferable to the Covered Calls Advisor since it would provide a higher annualized return-on-investment result, but either outcome would provide an excellent result for this investment position.  These returns will be achieved as long as the stock is above the $34.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.3275 ($34.65 -$1.05 -$.2725) provides 3.8% downside protection below today's $34.65 purchase price. 

Continuation of Covered Calls Position in Devon Energy Corp.

Upon the July 21, 2017 options expiration last week, the Covered Calls position in Devon Energy Corp. (ticker symbol DVN) expired with the stock price below the $33.00 strike price.  So, the July Call options expired and the 500 shares of Devon stock were retained in the Covered Calls Advisor Portfolio.  Today, when Devon stock was at $33.63, a sell-to-open order was executed to sell 5 August 18th, 2017 Call options at the $35.00 strike price for $.65 per share to continue the Devon Covered Calls position.

The history of this Devon Energy position so far as well as a potential return-on-investment result is detailed below:

Devon Energy Corp. (DVN) -- Continuation Covered Calls Position

The transactions were as follows:
05/25/2017  Bought 500 Devon Energy Corp. shares @ $37.45
05/25/2017 Sold 5 DVN June 16, 2017 $36.00 Call options @ $2.10
Note: this was a simultaneous buy/write transaction.
06/13/2017 Ex-dividend of $30.00 ($.06 x 500 shares)
06/16/2017 5 DVN June 16th, 2017 Call options expired
Note: the price of DVN stock closed at $31.76 upon the June 16th options expiration date.
07/03/2017 Sold 5 DVN July 21, 2017 $33.00 Call options @ $.87 per share
07/21/2017 5 DVN Call options expired
07/26/2017 Sold 5 DVN Aug 18, 2017 $35.00 Call options @ $.65 per share

A possible overall performance result (including commissions) would be as follows:
Bought 500 shares DVN: $18,729.95
= $37.45*500 + $4.95 commission

Net Profit:
(a) Options Income: +$1,800.25
= ($2.10 + $.87+ $.65) *500 shares - 3*$3.25 commissions
(b) Dividend Income: +$30.00
= $.06 * 500 shares
(c) Capital Appreciation (If DVN is above $35.00 strike price at August 18th, 2017 expiration): -$1,229.95
= ($35.00-$37.45)*500 shares - $4.95 commissions

Total Net Profit (If DVN stock is above $35.00 strike price at August 18, 2017 options expiration): +$600.30
= (+$1,800.25 options income +$30.00 dividends -$1,229.95 capital appreciation)

Absolute Return: +3.2%
= +600.30/$18,729.95
Annualized Return: +13.8%
= (+600.30/$18,729.95)*(365/85 days)

Established Covered Calls Position in Range Resources Corp.

Today, a covered calls position was established in Range Resources Corp. (ticker symbol RRC) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $21.00 slightly below the stock purchase price of $21.65. 

As detailed below, there is potential for a +2.7% absolute return in 24 days (equivalent to a +41.0% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks.

Range Resources Corp. (RRC) -- New Covered Calls Position

The transactions were as follows:
07/26/2017  Bought 500 Range Resources Corp. shares @ $21.65
07/26/2017 Sold 5 RRC Aug 18, 2017 $21.00 Call options @ $1.25
Note: this was a simultaneous buy/write transaction.

A possible overall performance result (including commissions) would be as follows:
Bought 500 shares RRC: $10,829.95
= $21.65*500 + $4.95 commission

Net Profit:
(a) Options Income: +$621.75
= ($1.25*500 shares) - $3.25 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If RRC is above $21.00 strike price at Aug 18th expiration): -$329.95
= ($21.00-$21.65)*500 shares - $4.95 commissions

Total Net Profit (If RRC is above $21.00 strike price at Aug 18, 2017 options expiration): +$291.80
= (+$621.75 options income +$0.00 dividends -$329.95 capital appreciation)

Absolute Return: +2.7%
= +$291.80/$10829.95
Annualized Return: +41.0%
= (+$291.80/$10829.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $20.40 ($21.65 - $1.25), which is 5.8% (.55 standard deviations) below the current market price of $21.65.  A recent quantitative study titled "Which Index Options Should You Sell" link provides statistically significant insights to determine which options strike price and expiration date combination should be selected to sell.  Figure 2 in this paper shows that the front month (i.e. next month) S&P 500 options at -0.5 standard deviations on average provide a significantly better return than a basic buy-and-hold strategy.  For this Range Resources position, the $21.00 front month option was chosen since its breakeven price is -0.55 standard deviations from the current price of $21.65.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Range Resources Corp. covered calls position is 65.5%. This compares with a probability of profit of 50.3% for a buy-and-hold of Range Resources stock over the same time period. Using this probability of profit of 65.5%, the Expected Value annualized ROI of this investment (if held until expiration) is +26.9% (+41.0% * 65.5%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $22.90 ($21.65 + $1.25).  This is the price above which it would have been more profitable to simply buy-and-hold Range Resources stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

Closed Foot Locker Inc. Position

There were nine July 21, 2017 options expiration positions in the Covered Calls Advisor Portfolio.  As detailed here (link), seven of the nine positions closed on or before expiration with substantial profits.  The remaining two positions (Devon Energy Co. and Foot Locker Inc.) closed at expiration with their stock price below the strike price.  Today, the Foot Locker position was closed out at a net loss by selling the 500 long shares that remained after last Friday's expiration.  The detailed results from this position are provided below.


Foot Locker Inc. (FL) -- Position Closed

The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Ex-dividend of $.31 per share
07/21/2017 5 FL Call options expired with stock price of $47.21 below the $48.00 strike price
07/25/2017 Sold 500 shares of Foot Locker at $45.74

The overall performance result (including commissions) for this Foot Locker position was as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)

Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions

(b) Dividend Income: +$155.00
= ($.31 dividend per share x 500 shares)

(c) Capital Appreciation (FL stock sold at $45.74: -$1,994.95
+($45.74-$49.72)*500 - $4.95 commissions

Total Net Loss: -$788.15

= (+$1,051.80 +$155.00 -$1,994.95)

Absolute Return: -3.2%

= -$788.15/$24,864.95

Annualized Return: -64.3%

= (-$788.15/$24,864.95)*(365/18 days)