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Thursday, March 1, 2018

Early Assignment of Rio Tinto PLC Covered Calls Position

Before the market open today, the Covered Calls Advisor received notification from my broker (Schwab) that the 3 Rio Tinto PLC (ticker symbol RIO) April 20th, 2017 Call options were exercised early, so the 300 shares of Rio Tinto stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $50.00 strike price. 

Rio Tinto stock was $54.71 at yesterday's market close.  Early exercise by the owners of these Call options was expected since the Call options were in-the-money and there was only $.04 time value [$4.75 midpoint of Call options bid/ask price - ($54.71 current stock price - $50.00 strike price)] remaining in these Call options.  So, the Call owners were willing to immediately forego the remaining $0.04 per share (by exercising their option to buy the shares) in order to capture today's large $1.7955 per share ex-dividend.  The per share stock price had increased slightly from $54.04 when this Rio Tinto position was originally established on February 7th to $54.71 (9.4% in-the-money) at yesterday's market close.

Rio Tinto is a London-based diversified mining company operating mostly in Australia.  They had reported their annual earnings for 2017 just prior to the Covered Calls Advisor establishing this position.   Largely as a result of increased commodity prices, their financial results were stellar.  Revenues increased to $40 billion, operating cash flow was an impressive $13.9 billion and earnings increased 69% above last year to $8.63 billion.  Mr. Jacques has been the Chief Executive for only about 18 months now, but he is demonstrating a very shareholder friendly management style.  A company record $5.2 billion will be distributed to shareholders in 2018 and an additional $1.0 billion will be used for share buybacks.

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 Rio Tinto position, recent early assignments in iShares China Large Cap ETF, Devon Energy, Best Buy, 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 +19.1%, +22.7%, +41.1%, +33.5%, +19.3%, +33.0%, +27.1%, +37.0%, +53.2%, +16.1%, +15.6%, and +19.8% respectively. 

As detailed below, the actual return-on-investment result achieved for this Rio Tinto position was a +0.9% absolute return (equivalent to +15.5% annualized return) for the 22 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.

Rio Tinto PLC (RIO) -- New Covered Calls Position
The transactions were:
02/07/2018 Bought 300 Rio Tinto shares @ $54.04
02/07/2018 Sold 3 Rio Tinto 04/20/2018 $50.00 Call options @ $4.52
Note: a simultaneous buy/write transaction was executed.
02/28/2018 Three RIO Call options exercised early (day prior to ex-dividend date); so stock assigned (sold) at $50.00 strike price.

The overall performance results (including commissions) for this Rio Tinto Covered Calls position was as follows:
Covered Calls Cost Basis: $14,862.96
= ($54.04 - $4.52) *300 + $6.96 commission

Net Profit Components:
(a) Options Income: +$1,356.00
= ($4.52*300 shares)
(b) Dividend Income (Option exercised early on Feb 28th, the business day prior to Mar 1st ex-div date): +$0.00
(c) Capital Appreciation (RIO assigned early on Feb 28th): -$1,216.95
+($50.00-$54.04)*300 shares - $4.95 commissions
Total Net Profit: +$139.05
= (+$1,356.00 +$0.00 -$1,216.95)

Absolute Return: +0.9%
= +$139.05/$14,862.96
Annualized Return: +15.5%
= (+$139.05/$14,862.96)*(365/22 days)

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