Tuesday, March 15, 2016

Established Covered Calls in Bristol-Myers Squibb Co.

Today, a covered calls position was established in Bristol-Myers Squibb Co. (ticker symbol BMY) with an Apr2016 expiration.  This Bristol-Myers covered calls position includes consideration of an upcoming $.38 quarterly dividend with an ex-div date of Mar 30th.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered call position was established with the strike price of $62.50 below the stock purchase price of $63.63.

As detailed below, two potential return-on-investment results for this position are:
If Early Assignment: +1.5% absolute return (equivalent to +36.9% annualized return for the next 15 days) if the stock is assigned early (business day prior to Mar 30th ex-date); OR
If Dividend Capture: +2.1% absolute return (equivalent to +24.1% annualized return over the next 32 days) if the stock is assigned at the Apr2016 expiration on April 15th.

1. Bristol-Myers Squibb Co. (BMY) -- New Covered Calls Position
The $.38 dividend of Mar 30th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.20 [$2.13 option premium - ($63.63 stock price - $62.50 strike price)] remaining in the short call option decays well below the upcoming $.38 dividend payment by March 29th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Bristol-Myers shares away to capture the dividend.

The transactions were:
03/15/2016 Bought 300 BMY shares @ $63.63
03/15/2016 Sold 3 BMY Apr2016 $62.50 Call options @ $2.13
Note: a simultaneous buy/write transaction was executed.
03/30/2016 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this Bristol-Myers covered calls position are as follows:
Stock Purchase Cost: $19,096.95
= ($63.63*300+$7.95 commission)

Net Profit:
(a) Options Income: +$636.75
= ($2.13*300 shares) - $2.25 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 30th ex-div date): +$0.00; or
(b) Dividend Income (If BMY assigned at Apr2016 expiration): +$114.00
= ($.38 dividend per share x 300 shares)
(c) Capital Appreciation (If BMY assigned early on Mar 29th): -$346.95
+($62.50-$63.63)*300 - $7.95 commissions; or
(c) Capital Appreciation (If BMY assigned at $62.50 at Apr2016 expiration): -$346.95
+($62.50-$63.63)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Mar 30th ex-dividend date): +$289.80
= (+$636.75 +$0.00 -$346.95); or
Total Net Profit (If BMY assigned at $62.50 at Apr2016 expiration): +$403.80
= (+$636.75 +$114.00 -$346.95)

1. Absolute Return [If option exercised on Mar 29th (business day prior to ex-dividend date)]: +1.5%
= +$289.80/$19,096.95
Annualized Return (If option exercised early): +36.9%
= (+$289.80/$19,096.95)*(365/15 days); OR

2. Absolute Return (If BMY assigned at $62.50 at Apr2016 expiration): +2.1%
= +$403.80/$19,096.95
Annualized Return: +24.1%
= (+$403.80/$19,096.95)*(365/32 days)

In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a good return-on-investment result, especially when considering the historically relatively low volatility for Bristol-Myers stock.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $61.12 ($63.63 -$.38 -$2.13) provides 3.9% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this Bristol-Myers position, all eleven criteria were achieved.