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Monday, March 14, 2016

Established Covered Calls in Western Digital Corporation

Today, a covered calls position was established in Western Digital Corporation (ticker symbol WDC) with an Apr2016 expiration.  This is the first position established with an April 2016 options expiration in the current Covered Calls Advisor Portfolio.  All other positions have a Mar2016 expiration (this Friday).  This WDC covered calls position includes consideration of an upcoming $.50 quarterly dividend with an ex-div date of Mar 30th.  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 below the stock purchase price of $48.23.

As detailed below, two potential return-on-investment results for this position are:
If Early Assignment: +2.4% absolute return (equivalent to +55.1% annualized return for the next 16 days) if the stock is assigned early (business day prior to Mar 30th ex-date); OR
If Dividend Capture: +3.5% absolute return (equivalent to +38.2% annualized return over the next 33 days) if the stock is assigned at the Apr2016 expiration on April 15th.

1. Western Digital Corporation (WDC) -- New Covered Calls Position
The $.50 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 [$4.43 option premium - ($48.23 stock price - $45.00 strike price)] remaining in the short call option decays well below the upcoming $.50 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 Western Digital shares away to capture the dividend.

The transactions were:
03/14/2016 Bought 300 WDC shares @ $48.23
03/02/2016 Sold 3 WDC Apr2016 $45.00 Call options @ $4.43
Note: a simultaneous buy/write transaction was executed.
03/30/2016 Upcoming ex-dividend of $.50 per share

Two possible overall performance results (including commissions) for this Western Digital covered calls position are as follows:
Stock Purchase Cost: $14,476.95
= ($48.23*300+$7.95 commission)

Net Profit:
(a) Options Income: +$1,326.75
= ($4.43*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 WDC assigned at Apr2016 expiration): +$150.00
= ($.50 dividend per share x 300 shares)
(c) Capital Appreciation (If WDC assigned early on Mar 29th): -$976.95
+($45.00-$48.23)*300 - $7.95 commissions; or
(c) Capital Appreciation (If WDC assigned at $45.00 at Apr2016 expiration): -$976.95
+($45.00-$48.23)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Mar 30th ex-dividend date): +$349.80
= (+$1,326.75 +$0.00 -$976.95); or
Total Net Profit (If WDC assigned at $45.00 at Apr2016 expiration): +$499.80
= (+$1,326.75 +$150.00 -$976.95)

1. Absolute Return [If option exercised on Mar 29th (business day prior to ex-dividend date)]: +2.4%
= +$349.80/$14,476.95
Annualized Return (If option exercised early): +55.1%
= (+$349.80/$14,476.95)*(365/16 days); OR

2. Absolute Return (If WDC assigned at $45.00 at Apr2016 expiration): +3.5%
= +$499.80/$14,476.95
Annualized Return: +38.2%
= (+$499.80/$14,476.95)*(365/33 days)

In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but 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 at expiration, the breakeven price of $43.30 ($48.23 -$.50 -$4.43) provides 10.2% 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 Western Digital Corporation position, all eleven criteria were achieved.