Covered Calls Established in ConocoPhillips Using Dividend Capture Strategy

Today, a Covered Calls position was established in ConocoPhillips (ticker symbol COP) with a October 25, 2019 expiration and at the $55.00 strike price.  Although the next ex-dividend date and amount has not yet been declared, based on its historic trend, a quarterly ex-dividend of $.305 per share is expected on October 18th, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the October 25th, 2019 options expiration date.  At the $55.00 strike price, the annual dividend yield is 2.1%.  The next quarterly earnings report will be on October 29th which is just after the options expiration date. 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 +1.5% absolute return (equivalent to +30.5% annualized return for the next 18 days) if the stock is assigned early (business day prior to the expected October 18th ex-date); OR +2.1% absolute return (equivalent to +29.0% annualized return over the next 26 days) if the stock is assigned on the October 25th options expiration date.


ConocoPhillips (COP) -- New Covered Calls Position

If the current time value (i.e. extrinsic value) of $.84 [$2.91 options premium - ($57.07 stock price - $55.00 strike price) remaining in the two short Call options decays substantially (down to about $.15 or less) by October 17th (the last 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 ConocoPhillips shares away to capture the dividend payment.

The transactions were:
09/30/2019 Bought 200 ConocoPhillips shares @ $57.07
09/30/2019 Sold 2 COP 10/25/2019 $55.00 Call options @ $2.91
Note: A simultaneous buy/write transaction was executed.   The Implied Volatility was attractive at 31.2.
10/18/2019 Expected upcoming quarterly ex-dividend of $.305 per share

Two possible overall performance results (including commissions) for this ConocoPhillips Covered Calls position are as follows:
Covered Calls Cost Basis: $10,838.29
= ($57.07 - $2.91) *200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$582.00
= ($2.91 * 200 shares)
(b) Dividend Income (If option exercised early on the business day prior to Oct 18th ex-div date): +$0.00; or
(b) Dividend Income (If ConocoPhillips shares assigned at Oct 25th, 2019 expiration): +$61.00
= ($.305 dividend per share x 200 shares)

(c) Capital Appreciation (If COP assigned early on Oct 17th): -$418.95
+($55.00 -$57.07) * 200 shares - $4.95 commissions; or
(c) Capital Appreciation (If COP assigned at $55.00 strike price at options expiration): -$418.95
+($55.00 -$57.07) * 200 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Oct 17th (business day prior to Oct 18th ex-dividend date)]: +$163.05

= (+$582.00 +$0.00 -$418.95); or

2. Total Net Profit (If ConocoPhillips shares assigned at $55.00 at Oct 25th, 2019 expiration): +$224.05

= (+$582.00 +$61.00 -$418.95)

1. Absolute Return [If COP options exercised on business day prior to ex-dividend date]: +1.5%

= +$163.05/$10,838.29

Annualized Return (If option exercised early): +30.5%

= (+$163.05/$10,838.29)*(365/18 days); or

2. Absolute Return (If ConocoPhillips shares assigned at $55.00 at Oct 25, 2019 expiration): +2.1%

= +$224.05/$10,838.29

Annualized Return (If COP stock assigned at $55.00 at Oct 25, 2019 expiration): +29.0%

= (+$224.05/$10,838.29)*(365/26 days)

Either outcome would provide an excellent return-on-investment result.  These returns will be achieved as long as the stock is above the $55.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $53.855 ($57.07 -$2.91 -$.305) provides 5.6% 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, ten of the eleven criteria are achieved for this ConocoPhillips Covered Calls position.

Establish Covered Calls Position in Diamondback Energy

A new monthly Covered Calls position was established in Diamondback Energy (ticker symbol FANG) with an October 18th, 2019 options expiration date and at the $85.00 strike price when Diamondback Energy was priced at $89.61.  There are no earnings reports or ex-dividends prior to the options expiration date. 

Remarkably, analysts are universally bullish on Diamondback Energy.  According to Reuters, all thirty-four analysts rating Diamondback's stock have it as either a 'Buy' or 'Outperform'.  None rate it as 'Neutral', 'Underperform', or 'Sell'.  Their average price target is 60% above its current price (one of the highest potential increases in the S&P 500).         

As shown below, the potential return-on-investment result is +2.0% absolute return in 19 days (equivalent to a +38.6% annualized return-on-investment).


Diamondback Energy (FANG) -- New Covered Calls Position

The transactions were as follows:
09/30/2019 Bought 200 shares of Diamondback stock @ $89.61 per share 
09/30/2019 Sold 2 Diamondback October 18th, 2019 $85.00 Call options @ $6.13 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 39.5. 

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,666.29
= ($89.61 - $6.31) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$1,262.00
= ($6.31 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If FANG stock is above $85.00 strike price at October 18th expiration): -$926.95
= ($85.00 -$89.61) * 200 shares - $4.95 commission

Total Net Profit: +$335.05
= (+$1,262.00 options income +$0.00 dividend income -$926.95 capital appreciation)

Absolute Return: +2.0%
= +$335.05/$16,666.29
Equivalent Annualized Return: +38.6%
= (+$335.05/$16,666.29)*(365/19 days)

The downside 'breakeven price' at expiration is at $83.30 ($89.61 - $6.31), which is 7.0% below the current market price of $89.61.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 19, 2019 options expiration) for this Diamondback Covered Calls position is 73.4%, so the expected value annualized ROI of this investment (if held until expiration) is +28.3% (+38.6% * 73.4%), a very good result for this moderately in-the-money Covered Calls position, especially given that there is no earnings report prior to the options expiration date.

The 'crossover price' at expiration is $91.31 = $89.61 + [$6.31 - ($89.61 - $85.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Diamondback Energy stock until the October 18th, 2019 options expiration date rather than establishing this Covered Calls position.

Covered Calls Established in Alibaba Group and Cigna Corp.

Two new Covered Calls positions have been established in Alibaba Group Holding (ticker BABA) and Cigna Corp. (CI) with October 18th, 2019 options expiration dates. Two Alibaba Call options were sold at $8.25 for the $170.00 strike price when the stock price was $175.09 and 200 shares of Cigna were purchased at $149.92 while two Calls were sold at $7.68 at the $145.00 strike price.  Neither company has an earnings report prior to the expiration date.

As detailed below, the potential return-on-investment results are: 

• Alibaba Group Holding : +1.9% absolute return in 23 days (equivalent to a +29.8% annualized return-on-investment); and

• Cigna Corp. : +1.9% absolute return in 23 days (equivalent to a +30.5% annualized return-on-investment) 

1.  Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position

The transactions were as follows:
09/26/2019 Bought 200 shares of Alibaba stock @ $175.09 per share 
09/26/2019 Sold 2 Alibaba October 18th, 2019 $170.00 Call options @ $8.25 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 30.1 when this transaction was executed.  As detailed below, this high Implied Volatility provides for an immediate generous income credit of $3,720 from selling these 2.9% in-the-money Call options.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $33,374.29
= ($175.09 - $8.25) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$1,650.00
= ($8.25 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at Oct 18th expiration): -$1,022.95
= ($170.00 -$175.09) * 200 shares - $4.95 commission

Total Net Profit: +$627.05
= (+$1,650.00 options income +$0.00 dividend income -$1,022.95 capital appreciation)

Absolute Return: +1.9%
= +$627.05/$33,374.29
Equivalent Annualized Return: +29.8%
= (+$627.05/$33,374.29)*(365/23 days)

The downside 'breakeven price' at expiration is at $166.84 ($175.09 - $8.25), which is 4.7% below the current market price of $175.09.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 18, 2019 options expiration) for this Alibaba Covered Calls position is 67.0%, so the expected value annualized ROI of this investment (if held until expiration) is +20.0% (+29.8% * 67.0%), a good result for this moderately in-the-money Covered Calls position, especially given that there is no earnings report prior to the options expiration date.

The 'crossover price' at expiration is $178.25 = $175.09 + [$8.25 - ($175.09 - $170.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Oct. 18th, 2019 options expiration date rather than establishing this Covered Calls position.


2.  Cigna Corp. (CI) -- New Covered Calls Position

Of 23 analysts covering Cigna, 19 rate it as either Buy or Outperform, 4 rate it a Hold, and 0 rate it as either Underperform or Sell.  The 1-year target price of these analysts is $214 which is 42% above the current stock price.  Both Morgan Stanley and Citigroup came out today with Buy recommendations on Cigna and with $208 and $203 price targets respectively.  Both highlighted that Cigna's recent price decline is overdone and a reversal to higher price levels is expected.

The transactions were as follows:
09/26/2019 Bought 200 shares of Cigna stock @ $149.92 per share 
09/26/2019 Sold 2 Cigna Oct 18th, 2019 $145.00 Call options @ $7.68 per share
Note: this was a simultaneous Buy/Write transaction


A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $28,454.29
= ($149.92 - $7.68) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$,1536.00
= ($7.678 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Cigna stock is above $145.00 strike price at Oct 18th expiration): -$988.95
= ($145.00 -$149.92) * 200 shares - $4.95 commission

Total Net Profit: +$547.05
= (+$1,536.00 options income +$0.00 dividend income -$988.95 capital appreciation)

Absolute Return: +1.9%
= +$547.05/28,454.29
Equivalent Annualized Return: +30.5%
= (+$547.05/28,454.29)*(365/23 days)

The downside 'breakeven price' at expiration is at $142.24 ($149.92 - $7.68), which is 5.1% below the current market price of $149.92.

September 20th, 2019 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had six positions since the August 16th, 2019 monthly options expiration date.  One position (Lowe's Companies Inc.) was closed out early at a loss, three positions (Occidental Petroleum Corp., Valero Energy Group, and Wells Fargo Bank N.A.) were closed out early at a profit, one position (Alibaba Group Holdings Ltd.) was closed out at expiration at a profit, and one position (CommScope Holdings Co. Inc.) closed out-of-the-money (stock price below the strike price) at the September 20th, 2019 options expiration.  Therefore, the CommScope options expired and the shares owned remain in the Covered Calls Advisor Portfolio (as shown in the right sidebar).  A decision will be made soon to either sell the shares or to continue with Covered Calls positions by selling Call options against the shares currently held.  As always, the transactions and return-on-investment results for this position will be posted on this blog site on the same day the transactions occur.

• One Covered Calls position in Lowe's was closed out early on August 20th to avoid the uncertainty associated with the earnings report that was released the following day.  This position was closed at a loss -- see link
• One Covered Calls position in Occidental Petroleum was assigned early (on the last business day prior to the September 9th ex-dividend date) and was closed out at a profit -- see link for details.
• Two Covered Calls positions (Valero Energy and Wells Fargo) were closed out prior to the September 20th monthly options expiration date.  Both positions were closed at a profit -- see link for details.
• One Covered Calls position (Alibaba) closed in-the-money on the September 20th options expiration date yesterday, so these 400 shares were assigned (sold) at the $160.00 strike price.  The details of this closed position are shown below.
• One remaining open position in CommScope will be included in this calendar year 2019 results tracking when this position is closed out.

The Covered Calls Advisor's objective is to outperform the S&P 500 benchmark and to make profitable trades on at least two-thirds of positions established.  So far in calendar year 2019, 43 positions that have been closed out at a profit and only one was closed out at a loss.  The weighted average annualized return on investment for these 44 completed positions is +40.2%, which compares very favorably to the +26.9% year-to-date annualized roi for the S&P 500. 


Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed

The transactions were as follows:
08/23/2019 Bought 400 shares of Alibaba stock @ $164.67 per share 
08/23/2019 Sold 4 Alibaba September 20th, 2019 $160.00 Call options @ $9.30 per share
Note: this was a simultaneous Buy/Write transaction.
09/20/2019 Four BABA Call options expired in-the-money so 400 Alibaba shares sold at $160.00 strike price.
Note: the share price closed well in-the-money at $182.51

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $62,155.63
= ($164.67 - $9.30) * 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$3,720.00
= ($9.30 * 400 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (BABA stock closed above $160.00 strike price at September 20th expiration): -$1,872.95
= ($160.00 -$164.67) * 400 shares - $4.95 commission

Total Net Profit: +$1,847.05
= (+$3,720.00 options income +$0.00 dividend income -$1,872.95 capital appreciation)

Absolute Return: +3.0%
= +$1,847.05/$62,155.63
Equivalent Annualized Return: +37.4%
= (+$1,847.05/$62,155.63)*(365/29 days)

Continuation of Covered Calls Position in CommScope Holdings Co. Inc.

Upon the September 21st, 2018 options expiration, the five short Cash-Secured Puts position in CommScope Holdings Co. Inc. (ticker symbol COMM) expired with the stock price below the $15.00 strike price.  So, the August Put options expired and 500 shares of CommScope Holdings Co. Inc. stock were purchased in the Covered Calls Advisor Portfolio.  Today, with the price of CommScope stock at $13.01, a sell-to-open order was executed to sell 5 Sept 20, 2019 Call options at the $13.00 strike price for $.40 per share to continue this Covered Calls position.

As detailed below, the overall return-on-investment result for this CommScope Holdings Co. Inc. position if the stock is in-the-money (i.e. above the $13.00 strike price) at expiration is -5.5% absolute return in 72 days (equivalent to a -27.9% annualized return-on-investment).  


CommScope Holdings Co. Inc. (COMM) -- Continuation Covered Calls Position
The transactions to-date are as follows:
07/10/2019  Sold 5 COMM August 16th, 2019 $15.00 100% Cash-Secured Put options @ $.80
Note: the price of CommScope stock was $15.56 when this transaction was executed.
08/16/2019 Stock was below strike price at expiration, so 5 Put options expired and 500 shares of CommScope were purchased at $15.00 per share.
09/11/2019 Sold 5 COMM Sept 20, 2019 $13.00 Call options at $.40 per share
Note: the price of COMM stock was $13.01 when these Calls were sold


A possible overall performance result (including commissions) for this CommScope Holdings Covered Calls position is as follows:
Covered Calls Cost Basis: $7,508.30
= $15.00 *500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$591.70
= ($.80 +$.40) * 500 shares - $8.30 commission
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If COMM shares assigned at $13.00 strike price at options expiration): -$1,004.95
=($13.00-$15.00)* 500 shares - $4.95 commissions

Total Net Profit (If CommScope shares assigned at $13.00 at Sept 20, 2019 expiration): -$413.25

= (+$591.70 +$0.00 -$1,004.95)

Absolute Return: -5.5%

= -$413.25/$7,508.30

Annualized Return: -27.9%

= (-$413.25/$7,508.30)*(365/72 days)

Early Assignment of Occidental Petroleum Covered Calls

Early this morning I received email and text notifications from my broker (Schwab) that all 4 Occidental Petroleum Corp. (ticker symbol OXY) Call options were exercised early, so the 400 shares of Occidental Petroleum stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $40.00 strike price. 

Details of the transactions and the results for this Occidental Petroleum position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $.55 = [$2.56 options premium - ($42.01 stock price - $40.00 strike price).  By yesterday's market close (the last business day prior to the ex-dividend date which is Monday, Sept 9th), the time value had declined to $0.00, so the full $.55 options income profit per share potential was achieved upon the early assignment closing of this position.  The per share price had increased from $42.01 when the position was originally established (on August 26th) to $45.46 at yesterday's market close.  Because the time value remaining in the Call options had declined to $0.00 at Friday's (Sept. 6th) market close, the owner of the Calls exercised their option to buy the shares at the $40.00 strike price in order for them to capture the $.79 dividend.  As detailed below, this early assignment provided an attractive return-on-investment (roi) result: +1.4% absolute return (equivalent to +38.2% annualized roi for the 13 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.  As always, the transactions details will be posted on this blog site the same day that they occur.

The detailed results for this Occidental Petroleum position are provided below.


Occidental Petroleum Corp. (OXY) -- Early Assignment of OXY Covered Calls Position

The transactions were:
08/26/2019 Bought 400 Occidental Petroleum shares @ $42.01
08/26/2019 Sold 4 OXY 09/20/2019 $40.00 Call options @ $2.56
Note: A simultaneous buy/write transaction was executed.   The Open Interest in these Calls was 174 contracts and the Implied Volatility was very attractive at 40.3 considering the large size and relative predictability of Oxy's business.
09/06/2019 Early exercise of 4 OXY Sept 20th, 2019 $40.00 Call options, so 400 OXY shares assigned (i.e. sold) at $40.00 strike price.

The overall performance result (including commissions) for this Occidental Petroleum Covered Calls position is as follows:
Covered Calls Cost Basis: $15,787.63
= ($42.01 - $2.56) *400 shares + $7.63 commissions

Net Profit Components:
(a) Options Income: +$1,024.00
= ($2.56 *400 shares)
(b) Dividend Income (Call options exercised early on Sept 6th, the business day prior to Sept 9th ex-dividend date): +$0.00

(c) Capital Appreciation (OXY assigned early on Sept 6th): -$808.95
+($40.00 -$42.01) *400 shares - $4.95 commissions

Total Net Profit [Options exercised on Sept 6th (business day prior to Sept 9th ex-dividend date)]: +$215.05

= (+$1,024.00 +$0.00 -$808.95)

Absolute Return: +1.4%

= +$215.05/$15,787.63

Annualized Return: +38.2%

= (+$273.71/$13,224.95)*(365/13 days)