Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a $.32 per share ex-dividend on June 12th is prior to the June 19th options expiration date. Importantly to the Covered Calls Advisor's analysis, all nine criteria of the Dividend Capture Strategy (see table at end of this post) are met with this position. The Covered Calls Advisor's current Overall Market Meter outlook remains Bearish meaning that my best estimate is that the stock market will be lower a month from today. If so, the appropriate Covered Calls strategy is to sell in-the-money strike prices. Even if the stock market declines during the next month, hopefully the decline will be a moderate one and the stock price of American International Group will not decline below its $29.00 strike price at closing on the June 19th options expiration date, in which case the maximum potential profit in this AIG position would be achieved even as the stock market declines.
As detailed below, two potential return-on-investment results are:
- +2.8% absolute return (equivalent to +67.2% annualized return for the next 15 days) if the stock is assigned early (business day prior to the June 12th ex-dividend date); OR
- +3.9% absolute return (equivalent to +61.8% annualized return over the next 23 days) if the stock is assigned on the June 19th options expiration date.
American International Group Inc. (AIG) -- New Covered Calls Position
The transactions are:
05/28/2020 Sold 3 AIG 6/19/2020 $29.00 Call options @ $2.97
Note: a simultaneous buy/write transaction was executed. Open Interest in these Calls was 1,884 contracts and their Implied Volatility was 49.3 when this position was transacted.
06/12/2020 Upcoming quarterly ex-dividend of $.32 per share
Note: the annual dividend yield at the purchase price is 4.1%.
Two possible overall performance results (including commissions) for this American International Group Covered Calls position are as follows:
Covered Calls Cost Basis: $8,468.01
= ($31.19 - $2.97) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$891.00
= ($2.97 * 300 shares)
(b) Dividend Income (If option exercised early on June 11th, the business day prior to the June 12th ex-div date): +$0.00; or
(b) Dividend Income (If AIG stock assigned at June 19th, 2020 options expiration): +$96.00
= ($.32 dividend per share x 300 shares)
(c) Capital Appreciation (If AIG Call options assigned early on June 11th): -$657.00
+($29.00 - $31.19) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $29.00 strike price at options expiration): -$657.00
+($29.00 - $31.19) * 300 shares
+($29.00 - $31.19) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $29.00 strike price at options expiration): -$657.00
+($29.00 - $31.19) * 300 shares
1. Total Net Profit [If option exercised on June 11th (business day prior to the June 12th ex-dividend date)]: +$234.00
= (+$891.00 options income +$0.00 dividend income -$657.00 capital appreciation); or
2. Total Net Profit (If AIG shares assigned at $29.00 at June 19th, 2020 expiration): +$330.00
= (+$891.00 +$96.00 -$657.00)
1. Absolute Return [If option exercised on June 11th (business day prior to ex-dividend date)]: +2.8%
= +$234.00/$8,468.01
Annualized Return (If option exercised early): +67.2%
= (+$234.00/$8,468.01)*(365/15 days); or
2. Absolute Return (If AIG shares assigned at $29.00 at June 19th, 2020 options expiration): +3.9%
= +$330.00/$8,468.01
Annualized Return (If AIG shares assigned at $55.00 at June 19th, 2020 expiration): +61.8%
= (+$330.00/$8,468.01)*(365/23 days)
Either outcome provides a very attractive return-on-investment result for this AIG investment. These returns will be achieved as long as the stock is above the $29.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $27.90 ($31.19 -$2.97 -$.32) provides 10.5% downside protection below today's stock purchase price.
There is a 70.1% probability that the Calls will be above the $29.00 strike price at options expiration and thus the maximum potential profit would be achieved.
At least eight of the nine 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 American International Group position, all nine criteria are met.
