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Tuesday, January 30, 2018

Established Covered Calls in Intel Corporation

Today, a Covered Calls position was established in Intel Corporation (ticker symbol INTC) with a February 16th, 2018 expiration and at the $47.50 strike price.  This position has an upcoming quarterly ex-dividend on Feb 6th of $.30 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the Feb 16th, 2018 options expiration date.  Quarterly earnings were just reported last week, so the next earnings report will not be until late April.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Neutral, a slightly in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +0.6% absolute return (equivalent to +32.1% annualized return for the next 7 days) if the stock is assigned early (business day prior to February 6th ex-date); OR +1.3% absolute return (equivalent to +25.4% annualized return over the next 18 days) if the stock is assigned on the February 16th options expiration date.


Intel Corporation (INTC) -- New Covered Calls Position
An ex-dividend occurs on February 6th for $.30 per share.  Although unlikely, if the current time value (i.e. extrinsic value) of $.31 [$2.04 option premium - ($49.23 stock price - $47.50 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by Feb 5th (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 400 Intel shares away to capture the dividend payment.

The transactions were:
01/30/2018 Bought 400 Intel shares @ $49.23
01/30/2018 Sold 4 Intel 02/16/2018 $47.50 Call options @ $2.04
Note: a simultaneous buy/write transaction was executed.
02/06/2018 Upcoming quarterly ex-dividend of $.30 per share

Two possible overall performance results (including commissions) for this Intel Covered Calls position are as follows:
Covered Calls Cost Basis: $18,880.95
= ($49.23 - $2.04) *400 + $4.95 commission

Net Profit Components:
(a) Options Income: +$813.32
= ($2.04*400 shares) - $2.68 commissions
(b) Dividend Income (If option exercised early on Feb 5th, the business day prior to Feb 6th ex-div date): +$0.00; or
(b) Dividend Income (If INTC assigned at Feb 16th, 2018 expiration): +$120.00
= ($.30 dividend per share x 400 shares)
(c) Capital Appreciation (If INTC assigned early on Feb 5th): -$696.95
+($47.50-$49.23)*400 shares - $4.95 commissions; or
(c) Capital Appreciation (If INTC assigned at $47.50 strike price at options expiration): -$696.95
+($47.50-$49.23)*400 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Feb 5th (business day prior to February 6th ex-dividend date)]: +$116.37
= (+$813.32 +$0.00 -$696.95); or
2. Total Net Profit (If Intel assigned at $47.50 at Feb 16, 2018 expiration): +$236.37
= (+$813.32 +$120.00 -$696.95)

1. Absolute Return [If option exercised on Feb 5th (business day prior to ex-dividend date)]: +0.6%
= +$116.37/$18,880.95
Annualized Return (If option exercised early): +32.1%
= (+$116.37/$18,880.95)*(365/7 days); or
2. Absolute Return (If Intel assigned at $47.50 at Feb 16, 2018 expiration): +1.3%
= +$236.37/$18,880.95
Annualized Return (If Intel assigned at $47.50 at Feb2018 expiration): +25.4%
= (+$236.37/$18,880.95)*(365/18 days)

Either outcome provides a good return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $47.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $46.89 ($49.23 -$2.04 -$.30) provides 4.8% 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 of the eleven criteria are achieved for this Intel position.

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