Thursday, November 10, 2016

Early Assignment of Eli Lilly and Company Covered Calls

The Covered Calls Advisor had an Eli Lilly and Company (ticker LLY) November 2016 covered calls position at the $75 strike price.  Early this morning, I received email notification from my broker (Schwab) that the 4 LLY Call options were exercised early, so the 400 shares of Lilly stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $75 strike price.

Details of the transactions and results for this Eli Lilly covered calls position are provided below.  The LLY shares had risen from $76.76 when purchased (on October 26th) to $78.39 at yesterday's market close.  The time value remaining in the Call options had declined to $0.00 (based on the midpoint of the $3.20/$3.55 bid/ask spread at the market close yesterday) -- so it was expected that the owner of the Call options would exercise his/her option early in order to purchase the 400 shares and thus capture the dividend.  In this advisor's experience, early assignment normally occurs only in those relatively deep-in-the-money positions when there is less than $.15 time value remaining near the end of trading on the day prior to the ex-div date. 

As detailed below, the actual return-on-investment result for this closed position was a +1.3% absolute return (equivalent to +32.7% annualized return) for the 14 days holding period.  This result was slightly better than the 30.4% annualized ROI that would have occurred if the covered calls had instead been held until expiration and if the options were exercised then.

The transactions history was as follows:
10/26/2016 Bought 400 LLY shares @ $76.76
10/26/2016 Sold 4 LLY Nov2016 $75.00 Call options @ $2.75
Note: a simultaneous buy/write transaction was executed.
11/10/2016 Quarterly ex-dividend of $.51 per share
11/09/2016 4 LLY Call options assigned and associated 400 LLY shares sold at $75.00 strike price.  Note: the price of LLY stock was $78.39 at yesterday's market close.

The overall performance result (including commissions) for this Eli Lilly covered calls position was as follows:
Stock Purchase Cost: $30,711.95
= ($76.76*400+$7.95 commission)

Net Profit:
(a) Options Income: +$1,097.00
= ($2.75*400 shares) - $3.00 commissions
(b) Dividend Income (Call options exercised early on business day prior to Nov 10th ex-div date): +$0.00
(c) Capital Appreciation (Early assignment on Nov 9th): -$311.95
+($75.00 sale price - $76.76 purchase price)*400 shares - $7.95 commissions

Total Net Profit (Call options exercised on day prior to Nov 10th ex-dividend date): +$385.05
= (+$1,097.00 options income +$0.00 dividend income -$711.95 capital appreciation)

Absolute Return: +1.3%
= +$385.05/$30,711.95
Annualized Return (Call options were exercised early): +32.7%
= (+$385.05/$30,711.95)*(365/14 days)

The cash now available from the closing of this Lilly covered calls position will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.  Any new positions will be posted on this site on the same day they occur.