On February 24th, 2021 the Covered Calls Advisor established a Covered Call in Home Depot Inc. at the March 19th, 2021 $250.00 strike price. The price of the 100 Home Depot shares has increased from the purchase price of $258.75 to $267.18 this afternoon.
Home Depot goes ex-dividend tomorrow at $1.65 per share and since there was virtually no time value remaining in the Call option, the Covered Calls Advisor decided to roll up from the $250.00 strike to the $260.00 strike at the same March 19th, 2021 options expiration date. A vertical debit spread transaction was executed at a net debit of $9.24 ($17.04 - $7.80) per share -- so $.76 time value ($260.00 new strike price - $250.00 old strike price - $9.24 net debit) was added to the Covered Call position accompanied by a likelihood that the $1.65 dividend will be captured tomorrow.
A potential return-on-investment result for this Home Depot Covered Calls position is +2.2% absolute
return in 24 days (equivalent to a +33.4% annualized
return-on-investment) if the stock price closes above the $260.00 strike price on the March 19th options expiration date.
By rolling up the original Covered Calls, this result would exceed the +1.9% absolute return (+28.9% annualized) that was the maximum potential roi at expiration of the original Covered Calls position at the $250.00 strike price. In Covered Calls investing parlance, this is sometimes referred to as
"hitting a double" (instead of the usual "single"), since the roll up
enables us to sell Calls twice against the original stock purchase with both positions
being at the same options expiration date.
The detailed transactions and a potential result are provided below.
Home Depot Inc. (HD) -- New Covered Call Position
The buy/write transaction was:
02/24/2021 Bought 100 Home Depot shares @ $258.75
02/24/2021 Sold 1 Home Depot 03/19/2021 $250.00 Call option @ $11.79
Note: Implied Volatility (IV) of the Call options was at 24.7 when this position was established.
03/09/2021 Roll-Up transaction: Bought-to-Close 1 3/19/2021 $250.00 Call option and simultaneously Sold-to-Open 1 3/19/2021 $260.00 Call at a net debit price of $9.24.
03/10/2021 Upcoming quarterly ex-dividend of $1.65 per share
A possible overall performance result (including commissions) for this Home Depot Covered Call position is as follows:
Covered Calls Cost Basis: $24,696.67
= ($258.75 - $11.79) * 100 shares + $.67 commission
Net Profit Components:
(a) Options Income: +$252.99
= ($11.79 -$17.04 +$7.80) * 100 shares + $2.01 commissions
(b) Dividend Income (If Home Depot stock assigned at March 19th, 2021 options expiration): +$165.00
= ($1.65 dividend per share x 100 shares)
(c) Capital Appreciation (If shares assigned at $260.00 strike price at options expiration): +125.00
+($260.00 - $258.75) * 100 shares
Absolute Return-on-Investment (If Home Depot shares assigned on March 19th options expiration date): +2.2%
