Today, a new covered calls position was established in Cummins Inc. (ticker symbol CMI) with a Nov2015 expiration. The Cummins stock was purchased at $103.97 and the Nov2015 Call options were simultaneously (i.e. a single buy-write transaction) sold at the $102.00 strike price for $3.12 each.
This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Nov 18th) prior to the November 20th options expiration date. Details of this position are provided below.
1. Cummins Inc. (CMI)
As shown below, either early assignment or assignment at the Nov2015 options expiration date will provide very good return-on-investment results.
These two potential return-on-investment results are:
If Dividend Capture: +1.9% absolute return (equivalent to +59.3% annualized return over the next 12 days) if the stock is assigned at Nov2015 expiration on November 20th.
11/09/2015 Bought 200 CMI shares @ $103.97
11/09/2015 Sold 2 CMI Nov2015 $102.00 Call options @ $3.12
11/18/2015 Upcoming ex-dividend of $.975 per share
Two possible overall performance results (including commissions) for this Cummins (CMI) covered calls position are as follows:
Stock Purchase Cost: $20,802.95
= ($103.97*200+$8.95 commission)
(a) Options Income: +$613.55
= ($3.12*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Nov 18th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Nov2015 expiration): +$195.00
= ($.975 dividend per share x 200 shares)
Either outcome would provide a very good return. These returns will be achieved as long as the stock is above the $102.00 strike price.