Today the Covered Calls Advisor's buy/write limit order was executed and a Covered Calls position was established in Rio Tinto PLC (ticker RIO) with a March 19th, 2021 options expiration date. Two hundred Rio Tinto shares were purchased at $87.38 and two Call options were sold at $5.74 at the $82.50 strike price -- so the net debit was $81.64 per share ($87.38 stock price - $5.74 Call options price). Therefore, an initial time value of $.86 per share ($82.50 strike price - $81.64 net debit cost basis) was achieved. The Delta was approximately 74.5 when this transaction was executed which closely approximates the probability that the Call options will be in-the-money (i.e. above the $82.50 strike price) on the options expiration date. There is an upcoming ex-dividend of $4.02 ($3.09 semi-annual dividend + $.93 special dividend) per share on March 4th which is prior to the March 19th options expiration date. So two potential return-on-investment results are detailed below and include both the possibility of early assignment on the day prior to the ex-dividend date as well as the scenario that the stock is in-the-money, and therefore assigned (i.e. sold at the $82.50 strike price), on the March 19th options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.1% absolute return (equivalent to +27.5% annualized return-on-investment for the next 14 days) if the stock is assigned early (business day prior to the March 4th ex-dividend date); OR
- +6.0% absolute return (equivalent to +72.7% annualized return over the next 30 days) if the stock is assigned on the March 19th options expiration date.
Rio Tinto PLC (RIO) -- New Covered Calls Position
02/18/2021 Bought 200 Rio Tinto shares @ $87.38
02/18/2021 Sold 2 RIO 3/19/2021 $82.50 Call options @ $5.74
Note: the Implied Volatility of the Call options was 26.8 when this transaction was executed.
03/04/2021 Upcoming quarterly ex-dividend of $4.02 ($3.09 semi-annual dividend + $.93 special dividend) per share
Two possible overall performance results (including commissions) for this Rio Tinto Covered Calls position are as follows:
Covered Calls Cost Basis: $16,329.34
= ($87.38 - $5.74) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,148.00
= ($5.74 * 200 shares)
(b) Dividend Income (If both options exercised early on March 3rd, the business day prior to the March 4th ex-div date): +$0.00; or
(b) Dividend Income (If RIO stock assigned at March 19th, 2021 expiration): +$804.00
= ($4.02 dividends per share x 200 shares)
= +($82.50 - $87.38) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $82.50 strike price on the March 19th options expiration date): -$976.00
= +($82.50 - $87.38) * 200 shares
These returns will be achieved as long as the stock is above the $82.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $77.62 ($87.38 -$5.74 -$4.02) provides 11.2% downside protection below today's stock purchase price.
