Established Covered Calls Position in Wells Fargo Bank Using the Dividend Capture Strategy

Today a Covered Calls position was established in Wells Fargo Bank (ticker symbol WFC) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $28.94 and 3 May 15th, 2020 Call options were sold at $1.86 at the $27.50 strike price.

At today's purchase price, the upcoming ex-dividend of $.51 on May 7th has a 6.8% annualized dividend yield.  So, this short-term (only 16 days until options expiration) position is established to take advantage of the potential to achieve a very high annualized return-on-investment in a position that meets all ten criteria of the Covered Calls Advisor's Dividend Capture Strategy (see table at end of this post).  In addition, Wells Fargo fundamentally is historically undervalued since it now trades at a price-to-tangible-book-value ratio of about 0.8, a level only about one-half of its prior 5-year median average. 

Two potential return-on-investment results for this position are highlighted below (including the possibility of early assignment since the ex-dividend is prior to the May 15th options expiration date).  Given the Covered Calls Advisor's current Overall Market Meter outlook is Bearish, an in-the-money Covered Calls position was established. 

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

•  +1.6% absolute return (equivalent to +80.9% annualized return for the next 7 days) if the stock is assigned early (business day prior to the May 7th ex-dividend date); OR 

• +3.4% absolute return (equivalent to +78.3% annualized return over the next 16 days) if the stock is assigned on the May 15th options expiration date.

Wells Fargo Bank (WFC) -- New Covered Calls Position
The transaction was:

04/30/2020 Bought 300 Wells Fargo Bank shares @ $28.94
Note: this stock price was down 3.5% from yesterday's closing price (and the Dow was down about 300 points) early in this morning's trading when this transaction executed.
04/30/2020 Sold 3 Wells Fargo 5/15/2020 $27.50 Call options @ $1.86
Note: a simultaneous buy/write transaction was executed and the Implied Volatility of the WFC 5/15/2020 $27.50 Call options that were sold was higher at 43.2 than the current CBOE S&P 500 Volatility Index (VIX) at 34.2.
05/07/2020 Upcoming quarterly ex-dividend of $.51 per share

Two possible overall performance results (including commissions) for this Wells Fargo Covered Calls position are as follows:
Covered Calls Cost Basis: $8,126.01
= ($28.94 - $1.86) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$558.00
= ($1.86 * 300 shares)
(b) Dividend Income (If option exercised early on May 6th, the business day prior to the May 7th ex-div date): +$0.00; or
(b) Dividend Income (If Wells Fargo stock assigned at May 15th, 2020 options expiration): +$153.00
= ($.51 dividend per share x 300 shares)

(c) Capital Appreciation (If Wells Fargo Call options assigned early on May 6th): -$432.00
+($27.50 - $28.94) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $27.50 strike price at options expiration): -$432.00
+($27.50 - $28.94) * 300 shares

1. Total Net Profit [If option exercised on May 6th (business day prior to the May 7th ex-dividend date)]: +$126.00

= (+$558.00 options income +$0.00 dividend income -$432.00 capital appreciation); or

2. Total Net Profit (If Wells Fargo shares assigned at $27.50 at May 15th, 2020 expiration): +$279.00

= (+$558.00 +$153.00 -$432.00)

1. Absolute Return [If option exercised on May 6th (business day prior to ex-dividend date)]: +1.6%

= +$126.00/$8,126.01

Annualized Return (If option exercised early): +80.9%

= (+$126.00/$8,126.01)*(365/7 days); or

2. Absolute Return (If Wells Fargo shares assigned at $27.50 at May 15th, 2020 options expiration): +3.4%

= +$279.00/$8,126.01

Annualized Return (If Wells Fargo shares assigned at $27.50 at May 15th, 2020 expiration): +78.3%

= (+$279.00/$8,126.01)*(365/16 days)

Either outcome provides a very attractive return-on-investment result for this Wells Fargo Bank investment.  These returns will be achieved as long as the stock is above the $27.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $26.57 ($28.94 -$1.86 -$.51) provides a substantial 8.2% downside protection below today's stock purchase price.

At least eight of the ten metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position.  As shown below with this Wells Fargo position, all ten criteria are met.