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Wednesday, June 12, 2013

Established Symantec Corp. Covered Calls -- Example of Early Assignment or Dividend Capture Strategy

Today, a new covered calls position was established in Symantec Corp. (Ticker Symbol SYMC) with a Jun2013 expiration and at the $22.00 strike price. The transactions are as follows:

06/12/2013 Bought 500 SYMC shares @ $22.19
06/12/2013 Sold 5 SYMC Jun2013 $22.00 Call Options @ $.40
06/17/2013 Ex-dividend of $.15 per share

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $.15 with an ex-dividend date next Monday (June 17th).  If the current time value (i.e. extrinsic value) of $.21 = [$.40 option premium - ($22.19 stock price - $22.00 strike price)] remaining in the short call option decays to less than the $.15 ex-divident amount by this Friday [June 14th (the business day prior to the ex-div date)], then there is a reasonably good possibility that the call options owner will exercise early and will call the stock away to capture the dividend. As shown below, two potential returns for this position are:
If Early Assignment: +0.75% absolute return (equivalent to +54.8% annualized return) if the stock is assigned early (day prior to June 17th ex-div date); OR
If Dividend Capture: +1.4% absolute return (equivalent to +47.3% annualized return) if the stock is assigned at June 2013 expiration on June 21st

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very good return.  These returns will be achieved as long as the stock stays above the $22.00 strike price at assignment (0.9% of downside protection).  Alternatively, if the stock declines below the strike price, the breakeven price of $21.79 ($22.19-$.40) provides 1.8% downside protection from the original $22.19 purchase price. 

In summary, this covered calls investment provides the potential for nice absolute and annualized ROIs for a short-term (less than 2 weeks) covered calls trade.  Normally, the Covered Calls Advisor uses this strategy for approximately one-month expirations, but this shorter-term situation was done to show that this strategy can be applied to other timeframes also.  

The Covered Calls Advisor has established a set of criteria to identify situations that are advantageous for establishing covered calls positions that might achieve good returns from either an early assignment or from assignment upon options expiration.   There are a very limited number of these "Early Assignment or Dividend Capture" covered call opportunites that meet the criteria below, but if/when we find them we should take full advantage.

As shown below, this SYMC position satisfies most of these criteria:

Two possible overall performance results (including commissions) for this Symantec Corp (SYMC) covered calls position are as follows:
Stock Purchase Cost: $11,103.95
= ($22.19*500+$8.95 commission)

Net Profit:
(a) Options Income: +$187.30
= ($.40*500 shares) - $12.70 commissions
(b) Dividend Income (If option exercised early on day prior to Jun 17th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Jun2013 expiration): +$75.00
= ($.15 dividend per share x 500 shares); or
(c) Capital Appreciation (If stock assigned early on June 14th): -$103.95
+($22.00-$22.19)*500 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $22.00 at Jun2013 expiration): -$103.95
+($22.00-$22.19)*500 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Jun 17th ex-div date): +$83.35
= (+$187.30 +$0.00 -$103.95); or
Total Net Profit (If stock assigned at $22.00 at Jun2013 expiration): +$158.35
= (+$187.30 +$75.00 -$103.95)

1. Absolute Return (If option exercised on day prior to Jun 17th ex-div date): +0.75%
= +$83.35/$11,103.95
Annualized Return (If option exercised early): +54.8%
= (+$83.35/$11,103.95)*(365/5 days); OR

2. Absolute Return (If stock assigned at $22.00 at Jun2013 expiration): +1.4%
= +$158.35/$11,103.95
Annualized Return (If stock assigned): +47.3%
= (+$158.35/$11,103.95)*(365/11 days);