Thursday, October 31, 2013
Established Holly Frontier Corporation Covered Calls -- Example of Early Assignment or Dividend Capture Strategy
10/31/2013 Sold 6 AEM Dec2013 $27.50 Call Options @ $2.72
Note: the price of AEM was $29.20 today when these options were sold.
11/27/2013 Ex-dividend of $.22 per share
If Dividend Capture: +4.6% absolute return (equivalent to +32.2% annualized return over the next 52 days) if the stock is assigned at Dec 2013 expiration on December 20th.
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 is above the $27.50 strike price at assignment -- a nice 4.7% of downside protection. Alternatively, if the stock declines below the strike price, the breakeven price of $26.146 ($29.086-$.22-$2.72) provides a very substantial 9.4% downside protection.
In summary, this covered calls investment provides a very nice annualized ROI potential for such a conservative (hedged with substantial downside protection and the next earnings announcement is after the December options expiration date) investment.
Two possible overall performance results (including commissions) for this Agnico Eagle(AEM) covered calls position are as follows:
Stock Purchase Cost: $17,460.55
= ($29.086*600+$8.95 commission)
(a) Options Income: +$1,618.55
= ($2.72*600 shares) - $13.45 commissions
(b) Dividend Income (If option exercised early on day prior to Nov 27th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Dec2013 expiration): +$132.00 = ($.22 dividend per share x 600 shares); or