Today, a covered calls position was established in Paccar Inc. (ticker symbol PCAR) with a Jan2016 expiration. This position includes consideration of an upcoming special dividend with an ex-div date of Dec 16th. A generous $1.40 special dividend is being provided because of the positive year-to-year sales trend in Paccar's two primary markets (U.S. and Europe). Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established (with the strike price of $45.00 being below the stock purchase price of $48.97).
As detailed below, two potential return-on-investment results for this position are:
If Dividend Capture: +3.7%
absolute return (equivalent to +36.5% annualized return over the next 37
days) if the stock is assigned at Jan2016 expiration on January 15th.
1. Paccar Inc. (PCAR) -- New Covered Calls Position
The transactions were:
12/10/2015 Bought 200 PCAR shares @ $48.97
12/10/2015 Sold 2 PCAR Jan2016 $45.00 Call options @ $4.47
Note: a simultaneous buy/write transaction was executed.
12/16/2015 Upcoming special dividend of $1.40 per share
Two possible overall performance results (including commissions) for this PCAR covered calls position are as follows:
Stock Purchase Cost: $9,801.95
= ($48.97*200+$7.95 commission)
(a) Options Income: +$884.55
= ($4.47*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Dec 16th ex-dividend date): +$0.00; or
(b) Dividend Income (If PCAR assigned at Jan2016 expiration): +$280.00
= ($1.40 dividend per share x 200 shares)
Either outcome would provide a very attractive return-on-investment result for this investment. These returns will be achieved as long as the stock is above the $45.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $44.50 ($48.97 -$4.47) provides 9.1% downside protection below today's purchase price.