Covered Calls Position Established in Discovery Inc.

Today a Covered Calls position was established in Discovery Inc. (ticker symbol DISCA) when the Covered Calls Advisor's buy/write limit order was executed.  Four hundred shares were purchased at $29.18 and four July 16th, 2021 Call options were sold at $2.26 at the $27.50 strike price.  The time value when this Covered Call was established was $.58 per share = [$2.26 Call option price - ($29.18 stock price - $27.50 strike price)], so the downside breakeven price is $221.90 ($225.00 strike price - $3.10 time value).  Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Call position was established with the Delta at 72.8, which approximates a probability of 72.8% that the Call option will be in-the-money on the options expiration date. 

Discovery Inc. has agreed to merge with AT&T's Warner Media and will most likely be approved to become Warner Bros. Discovery in 2022 which will likely catapult them into third position (behind only Netflix and Disney) in the streaming entertainment media industry. The average target price of the 23 analysts covering Discovery is $43.26 (+48.3% above today's purchase price) and its forward year P/E ratio is only 9.2 based on currently forecasted earnings per share.  Fortunately, the next quarterly earnings report on 8/4/2021 is after the upcoming 7/16/2021 options expiration date.

As detailed below, a potential return-on-investment result for this Discovery Inc. position is +2.1% absolute return (equivalent to +29.9% annualized return over the next 26 days) if the stock is in-the-money and therefore assigned on the July 16th, 2021 options expiration date.

 

Discovery Inc. (DISCA) -- New Covered Calls Position

The buy/write transaction was as follows:
06/21/2021 Bought 400 shares of Discovery Inc. stock @ $29.18 per share 
06/21/2021 Sold 4 Discovery July 16th, 2021 $27.50 Call options @ $2.26 per share
Note: The Implied Volatility of the Call option was 37.6 when this transaction was executed.  

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $10,770.68
= ($29.18 - $2.26) * 400 shares + $2.68 commission

Net Profit Components:
(a) Option Income: +$901.32
= ($2.26 * 400 shares) - $2.68 commission
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DISCA stock is above $27.50 strike price at July 16th, 2021 expiration): -$672.00
= ($27.50 -$29.18) * 400 shares

Total Net Profit: +$229.32
= (+$901.32 Call option income +$0.00 dividend income -$672.00 capital appreciation)

Absolute Return-on-Investment: +2.1%
= +$229.32/$10,770.68
Equivalent Annualized Return-on-Investment: +29.9%
= (+$229.32/$10,770.68)*(365/26 days)