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Wednesday, July 26, 2017

Established Covered Calls Position in Intel Corp. -- Example of Dividend Capture Strategy

Today, a covered calls position was established in Intel Corp. (ticker symbol INTC) with an August 18, 2017 expiration and at the $34.00 strike price.  This position has an upcoming quarterly ex-dividend on August 3rd of $.2725 per share, so the potential return-on-investment results for this position includes the possibility of early exercise since the ex-dividend is prior to the Aug 18th options expiration date.

As detailed below, two potential return-on-investment results are:
  • A +1.15% absolute return (equivalent to +52.3% annualized return for the next 8 days) if the stock is assigned early (business day prior to August 3rd ex-div date); OR 
  • A +1.96% absolute return (equivalent to +29.7% annualized return over the next 24 days) if the stock is assigned on the August 18, 2017 options expiration date.
Either result substantially exceeds the Covered Calls Advisor's target for a greater than +20% maximum potential annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential covered calls returns can still be achieved in some carefully selected stocks.

Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established.  As shown in the chart below, a Covered Calls positions was established since the potential return-on-investment results are preferable in comparison to its comparable short Put options position in this instance:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "YES*" with an indication that "If 'YES' then consider avoiding position".  Intel does have a quarterly earnings report prior to the options expiration.  In fact, they will report after the market close tomorrow.  I decided to go forward and establish this position because semiconductor manufacturers Texas Instruments and Advanced Micro Devices (same industry as Intel) released their quarterly report yesterday.  Both companies beat analysts' revenue and earnings estimates and they guided next quarter higher than previous guidance -- and their stocks moved higher as a result.  I expect similar good results from Intel.

Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that Intel will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a covered calls position for Intel. 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, ten of the eleven criteria are achieved for this Intel Corp. position.



Details for this position as well as possible return-on-investment outcomes are provided below.

Intel Corp. -- Covered Calls Position Established
An ex-dividend occurs on August 3rd for $.2725.  If the current time value (i.e. extrinsic value) of $.40 [$1.05 option premium - ($34.65 stock price - $34.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by August 2nd (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 600 Intel shares away to capture the dividend payment.

The transactions were:
07/26/2017 Bought 600 INTC shares @ $34.65
07/26/2017 Sold 6 INTC Aug 18, 2017 $34.00 Call options @ $1.05
Note: a simultaneous buy/write transaction was executed.
08/03/2017 Upcoming quarterly ex-dividend of $.2725 per share

Two possible overall performance results (including commissions) for this Intel covered calls position are as follows:
Covered Calls Position Cost Basis: $20,168.85
= ($34.65 stock price -$1.05 options price) *600 shares +$8.85 commissions

Net Profit:
(a) Options Income: +$625.98
= ($1.05*600 shares) - $4.02 commissions
(b) Dividend Income (If option exercised early on August 2nd, the business day prior to ex-div date): +$0.00; or
(b) Dividend Income (If INTC assigned at Aug 18th, 2017 expiration): +$163.50
= ($.2725 dividend per share x 600 shares)
(c) Capital Appreciation (If INTC assigned early): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions; or
(c) Capital Appreciation (If INTC assigned at $34.00 strike price at Aug 18th options expiration): -$394.95
+($34.00-$34.65)*600 shares - $4.95 commissions

1. Total Net Profit [If option exercised early]: +$231.03
= (+$625.98 options income +$0.00 dividend income -$394.95 capital appreciation); or
2. Total Net Profit (If INTC assigned at $34.00 at expiration): +$394.53
= (+$625.98 options income +$163.50 dividend income -$394.95 capital appreciation)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.15%
= +$231.03/$20,168.85
Annualized Return (If option exercised early): +52.3%
= (+$231.03/$20,168.85)*(365/8 days); or
2. Absolute Return (If INTC assigned at $34.00 on August 18, 2017 expiration date): +1.96%
= +$394.53/$20,168.85
Annualized Return (If INTC assigned at $34.00 on August 18th options expiration date): +29.7%
= (+$394.53/$20,168.85)*(365/24 days)

Early assignment is preferable to the Covered Calls Advisor since it would provide a higher annualized return-on-investment result, but either outcome would provide an excellent result for this investment position.  These returns will be achieved as long as the stock is above the $34.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.3275 ($34.65 -$1.05 -$.2725) provides 3.8% downside protection below today's $34.65 purchase price. 

2 comments:

  1. From my perspective, the Aug 18 expiration got you $0.45 of extrinsic value. As I write this, INTC is at $34.77 and I can sell the ITM $34.50 strike for Friday's expiration (in 2 days) for $0.74 and get an extrinsic value of $0.47. I'd like to hold it to the ex-dividend date, and maybe sell a few more calls, but I wouldn't be heart-broken if I got assigned within 2 days. :)

    Or do you only do the monthlies? I guess some of your criteria would need to change if using different time frames. For example, 1% ITM has a different meaning for a call 2 days away vs 24 days away.

    Personally, I'd avoid it because of the earnings report expected tomorrow. But you addressed that issue. Good luck!

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  2. Thanks for your reply and thoughtful comments.

    For the Dividend Capture Strategy, the eleven criteria (shown in the spreadsheet above) were developed to provide for an attractive annualized return for either early assignment or assignment on the options expiration date as well as a reasonable possibility of early assignment. In this Intel position, the August 18th expiration was the only one that satisfied at least 9 of the 11 criteria.

    I now only occasionally sell weeklies. I appreciate the potential for significantly higher annualized returns (compared with monthlies), but it does require substantially greater active management than I'm currently comfortable with. As a primarily fundamental, value stock picker, I am finding the current market overvalued -- so I retain most of my equity in cash. But I do expect to gradually increase my exposure to weeklies in the future.

    ReplyDelete