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Monday, July 23, 2018

Established Covered Calls in Skyworks Solutions Inc.

Today, a Covered Calls position was established in Skyworks Solutions Inc. (ticker symbol SWKS) with a August 17th, 2018 expiration and at the $92.50 strike price.  This position has an upcoming quarterly ex-dividend on August 6th of $.38 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 Aug 17th, 2018 options expiration date.  Quarterly earnings were reported recently, so the next earnings report will not be until early November.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, a slightly in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +1.6% absolute return (equivalent to +42.1% annualized return for the next 14 days) if the stock is assigned early (business day prior to Aug 6th ex-date); OR +2.0% absolute return (equivalent to +28.5% annualized return over the next 26 days) if the stock is assigned on the August 17th options expiration date.

Skyworks Solutions Inc. (SWKS) -- New Covered Calls Position
Although unlikely, if the current time value (i.e. extrinsic value) of $1.50 [$4.37 option premium - ($95.37 stock price - $92.50 strike price)] remaining in the two short Call options decays substantially (down to about $.10 or less) by Aug 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 200 Skyworks Solutions shares away to capture the dividend payment.

The transactions were:
07/23/2018 Bought 200 Skyworks Solutions shares @ $95.37
07/23/2018 Sold 2 SWKS 08/17/2018 $92.50 Call options @ $4.37
Note: a simultaneous buy/write transaction was executed.
08/06/2018 Upcoming quarterly ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this Skyworks Solutions Covered Calls position are as follows:
Covered Calls Cost Basis: $18,204.95
= ($95.37 - $4.37) *200 + $4.95 commission

Net Profit Components:
(a) Options Income: +$872.66
= ($4.37*200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on Aug 5th, the business day prior to Aug 6th ex-div date): +$0.00; or
(b) Dividend Income (If Skyworks Solutions assigned at Aug 17th, 2018 expiration): +$76.00
= ($.38 dividend per share x 200 shares)
(c) Capital Appreciation (If SWKS assigned early on Aug 5th): -$578.95
+($92.50-$95.37)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If SWKS assigned at $92.50 strike price at options expiration): -$578.95
+($92.50-$95.37)*200 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Aug 5th (business day prior to February 6th ex-dividend date)]: +$293.71
= (+$872.66 +$0.00 -$578.95); or
2. Total Net Profit (If Skyworks Solutions shares assigned at $92.50 at Aug 17, 2018 expiration): +$369.71
= (+$872.66 +$76.00 -$578.95)

1. Absolute Return [If option exercised on Aug 5th (business day prior to ex-dividend date)]: +1.6%
= +$293.71/$18,204.95
Annualized Return (If option exercised early): +42.1%
= (+$293.71/$18,204.95)*(365/14 days); or
2. Absolute Return (If Skyworks Solutions shares assigned at $92.50 at Aug 17, 2018 expiration): +2.0%
= +$369.71/$18,204.95
Annualized Return (If SWKS assigned at $92.50 at Aug 17, 2018 expiration): +28.5%
= (+$236.37/$18,880.95)*(365/26 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 $92.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $90.62 ($95.37 -$4.37 -$.38) provides 5.0% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential Covered Dalls 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 Skyworks Solutions Covered Calls position.

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