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Wednesday, December 6, 2017

Early Assignment of Best Buy Inc. Covered Calls Position

Before the market open today, the Covered Calls Advisor received notification from my broker (Schwab) that the 4 Best Buy Inc. (ticker symbol BBY) December 15th, 2017 Call options were exercised early, so the 400 shares of Best Buy stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $52.50 strike price. 

Best Buy stock was $61.98 at yesterday's market close.  Early exercise by the owners of these Call options was expected since the Call options were deep in-the-money and there was only $.02 time value [$9.50 midpoint of Call options bid/ask price - ($61.98 current stock price - $52.50 strike price)] remaining in these Call options.  So, the Call owners were willing to immediately forego the remaining $0.02 per share (by exercising their option to buy the shares) in order to capture today's $0.34 per share ex-dividend.  The per share stock price had increased from $55.11 when this Best Buy position was originally established on October 25th to $61.98 (18.1% in-the-money) at yesterday's market close.

The Covered Calls Advisor preferred this early assignment outcome instead of keeping the Covered Calls position and capturing the $0.34 per share ex-dividend today since this early assignment resulted in higher annualized return-on-investment (+41.1% achieved) rather than if the position had instead been assigned on the December 15th options expiration date; which (including today's $0.34 per share dividend) would have resulted in a slightly lower +37.8% annualized ROI. 

Using the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (Link to 'Criteria for Identifying Dividend Capture Covered Calls Opportunities' blog article) has been working nicely recently.  In addition to this Best Buy position, recent early assignments in Schlumberger, Bank of America (2 positions), MGM Resorts, Kohl's, Intel, JPMorgan Chase, PulteGroup, and Goldman Sachs Covered Calls positions have achieved annualized return-on-investment results of 41.1%, 19.3%, 33.0%, 27.1%, 37.0%, 53.2%, 16.1%, 15.6%, and 19.8% respectively.  In each instance, the annualized returns for these early assignments exceeded that which would have been achieved if the dividends had instead been received for these Covered Calls and the Call options exercised on the options expiration date.

As detailed below, the actual return-on-investment result achieved for this Best Buy position was a +4.6% absolute return (equivalent to +41.1% annualized return) for the 41 days this position was held.  The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls position is established, the transactions details of which will be posted on this blog site the same day they occur.

Best Buy Inc. (BBY) -- Early Assignment of Covered Calls Position
The implied volatility of the Call options was 25.6 when this position was established on October 25th. 
The transactions were as follows:
10/25/2017 Bought 400 shares of Best Buy stock @ $55.11 per share 
10/25/2017 Sold 4 Best Buy November 17th, 2017 $52.50 Call options @ $4.23 per share
Note: this was a simultaneous Buy/Write transaction
11/17/2017 Bought-to-Close 4 Nov 17th $52.50 Call options @ $1.92 per share
11/17/2017 Sold -to-Open 4 Dec 15th, 2017 $52.50 Call options @ $2.68 per share
Note: this was a simultaneous Net Credit transaction of $.76 when the BBY stock was at $54.30.
12/05/2017 Four BBY Call options exercised early (day prior to ex-dividend date); so stock assigned (sold) at $52.50 strike price.
Note: the closing price of Best Buy stock was $61.98 when these Calls were exercised

The overall performance result (including commissions) was as follows:
Covered Calls Original Cost Basis: $20,359.63
= ($55.11 - $4.23)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$1,988.37
= ($4.23 - $1.92 + $2.68) * 400 shares) - $7.63 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$1,048.95
= ($52.50 -$55.11)* 400 shares - $4.95 commission

Total Net Profit: +$939.42
= (+$1,988.37 options income +$0.00 dividend income -$1,048.95 capital appreciation)

Absolute Return: +4.6%
= +$939.42/$20,359.63
Equivalent Annualized Return: +41.1%
= (+$939.42/$20,359.63)*(365/41 days)

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