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Wednesday, August 12, 2015

Covered Calls Position Established in Chevron Corporation

Today, a new covered calls position was established in Chevron (ticker symbol CVX) with an Aug2015 expiration.  The Chevron stock was purchased at $85.24 and the Aug2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $84.00 strike price for $1.75 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Aug 17th) prior to the August 21st options expiration date.  Details of this position is provided below.

1. Chevron Corp. (CVX)
A $1.07 quarterly dividend goes ex-dividend on August 17th.  If the current time value (i.e. extrinsic value) of $.51 [$1.75 option premium - ($85.24 stock price - $84.00 strike price)] remaining in the short call options decays further by this Friday (the day prior to next Monday's ex-div date), then there is a good possibility that the call option owner will exercise his/her option on Friday and will call the stock away to capture the dividend.  

As shown below, either early assignment this Friday or assignment at the Aug2015 options expiration date (a week from this Friday) will provide excellent return-on-investment results.
These two potential return-on-investment results for this Chevron covered calls position are:
If Early Assignment: +0.5% absolute return (equivalent to +35.4% annualized return for the next 5 days) if the stock is assigned early (the business day prior to the Aug 17th ex-div date); OR
If Dividend Capture:  +1.7% absolute return (equivalent to +63.5% annualized return over the next 10 days) if the stock is assigned at Aug2015 expiration on August 21st.

08/12/2015 Bought 200 CVX shares @ $85.24
08/12/2015 Sold 2 CVX Aug2015 $84.00 Call options @ $1.75
08/17/2015 Upcoming ex-dividend of $1.07 per share

Two possible overall performance results (including commissions) for this Chevron (CVX) covered calls position are as follows:
Stock Purchase Cost: $17,056.95
= ($85.24*200+$8.95 commission)

Net Profit:
(a) Options Income: +$339.55
= ($1.75*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Aug 17th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Aug2015 expiration): +$214.00
= ($1.07 dividend per share x 200 shares)
(c) Capital Appreciation [If stock assigned early on Aug 14th (business day prior to Aug 17th ex-div date)]: -$256.95
+($84.00-$85.24)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $84.00 at Aug2015 expiration): -$256.95
+($84.00-$85.24)*200 - $8.95 commissions

Total Net Profit (If option exercised on business day prior to Aug 17th ex-div date): +$82.60
= (+$339.55 +$0.00 -$256.95); or
Total Net Profit (If stock assigned at $84.00 at Aug2015 expiration): +$296.60
= (+$339.55 +$214.00 -$256.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +0.5%
= +$82.60/$17,056.95
Annualized Return (If option exercised early): +35.4%
= (+$82.60/$17,056.95)*(365/5 days); OR

2. Absolute Return (If stock assigned at $84.00 at Aug2015 expiration): +1.7%
= +$296.60/$17,056.95
Annualized Return (If stock assigned): +63.5%
= (+$296.60/$17,056.95)*(365/10 days)

Either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $84.00 strike price at assignment.