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Friday, July 7, 2017

Established Covered Calls Position in Foot Locker Inc. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Foot Locker Inc. (ticker symbol FL) with a July 21, 2017 expiration and at the $48.00 strike price.  This position has an upcoming quarterly ex-dividend on July 12th of $.31 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the July 21st options expiration date.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  A Covered Calls positions was preferable to its comparable short Put options position in this instance since the maximum potential income of $.71 ($.31 ex-div plus $.40 time value) for the Covered Calls was $.04 per share greater than the $.67 that was then available for selling 100% cash-secured Put options.   

As detailed below, a potential return-on-investment result is +0.75% absolute return (equivalent to +54.9% annualized return for the next 5 days) if the stock is assigned early (business day prior to July 12th ex-date); OR +1.4% absolute return (equivalent to +33.5% annualized return over the next 15 days) in the much more likely event that the stock is assigned on the July 21, 2017 options expiration date.

Foot Locker Inc. (FL) -- New Covered Calls Position
An ex-dividend occurs on July 12th for $.31.  If the current time value (i.e. extrinsic value) of $.40 [$2.12 option premium - ($49.72 stock price - $48.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by July 11th (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 500 Foot Locker shares away to capture the dividend payment.

The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Upcoming quarterly ex-dividend of $.31 per share

Two possible overall performance results (including commissions) for this Foot Locker covered calls position are as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)

Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions
(b) Dividend Income (If option exercised early on July 11th, the business day prior to July 12th ex-div date): +$0.00; or
(b) Dividend Income (If FL assigned at July 21st, 2017 expiration): +$155.00
= ($.31 dividend per share x 500 shares)
(c) Capital Appreciation (If FL assigned early on July 11th): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions; or
(c) Capital Appreciation (If FL assigned at $48.00 strike price at July 21st options expiration): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions

1. Total Net Profit [If option exercised on July 11th (business day prior to July 12th ex-dividend date)]: +$186.85
= (+$1,051.80 +$0.00 -$864.95); or
2. Total Net Profit (If FL assigned at $48.00 at July 21st expiration): +$341.85
= (+$1,051.80 +$155.00 -$864.95)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +0.75%
= +$186.85/$24,864.95
Annualized Return (If option exercised early): +54.9%
= (+$186.85/$24,864.95)*(365/5 days); or
2. Absolute Return (If FL assigned at $48.00 at July 21, 2017 expiration): +1.4%
= +$341.85/$24,864.95
Annualized Return (If FL assigned at $48.00 at July 21st expiration): +33.5%
= (+$341.85/$24,864.95)*(365/15 days)

Either outcome provides an excellent return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $48.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $47.29 ($49.72 -$2.12 -$.31) provides 4.9% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, all eleven criteria are achieved for this Foot Locker Inc. position.