It has been a difficult start to 2022 in the stock market. For example, the S&P 500 has now reached correction territory since it has declined by more than 10% already this year. I will continue my investing strategy that is consistent with my Slightly Bearish outlook--sell short-term (i.e. one month or less) moderately in-the-money Covered Calls. Covered Calls investing can be an especially attractive strategy in neutral and bearish markets like we are experiencing now since it provides significant downside protection while maintaining an opportunity to achieve profitable results. I am now establishing positions with stocks that: (1) have good current valuations using traditional valuation metrics; (2) appear on a least one of the several stock screeners I've developed over the past several years; and (3) have average analysts' target prices greater than 10% above their current price. In addition, I will continue to be alert to opportunities to use my Dividend Capture Strategy (as is the case with today's Citigroup position). I will also be watching the flood of earnings reports this week and next as well as the stock market's reaction to them to analyze those industries and companies that represent good opportunities for investment in the weeks ahead.
Today, a Covered Calls position was established in Citigroup Inc. (ticker symbol C) with the purchase of 400 shares at $50.12 per share and four May 6th, 2022 Call options were sold for $2.58 per share at the $48.00 strike price. So, the time value in the Call options was $.46 per share [$2.58 Call options premium - ($50.12 stock price - $48.00 strike price)]. Given the Covered Calls Advisor's currently cautious Overall Market Meter sentiment, a moderately in-the-money Covered Calls positions was established. The Delta of the Calls was 75.1 when this buy/write transaction was executed which approximates the probability of assignment on the May 6th, 2022 options expiration date.
Citigroup reported their 2022 Q1 earnings only 11 days ago which exceeded analysts' estimates by 30%. Citigoup is the only one of the six U.S. mega-cap banks (Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley) to appear in the Covered Calls Advisor's screener of Financial Sector companies. For Financial Sector companies, I pay particular attention to the Price-to-Tangible Book Value (P/TBV) as a valuation factor. Citigroup has a very attractive current P/TBV valuation of 0.58 which is below its prior 5-year average of 0.77. Also, its current fiscal year (FY2022) estimated P/E ratio is 7.4 which also compares favorably to its prior 5-year average of 7.7. Finally, according to Reuters Research, the average target price of the 28 analysts' following Citigroup is $67.06 (+33.8% above today's $50.12 purchase price).
Most mid- to large-cap companies in the Financial Sector provide only modest growth prospects, but they often pay 2.0%+ annual dividend yields. Consequently, the Covered Calls Advisor is targeting opportunities to use the Dividend Capture Strategy in all Financial Sector Covered Calls positions. Citi goes ex-dividend this Friday (April 29th) at $.51 per share, which provides a 4.1% annual dividend yield based on today's stock purchase price, and this dividend is included in the potential return-on-investment calculations below. This new Citigroup Covered Calls position continues the Dividend Capture Strategy of often selling
in-the-money monthly Covered Calls for one of the six U.S. mega-cap banks during each options expiration
month:
(JPMorgan Chase quarterly for Jan, Apr, July, and Oct options expirations;
Citigroup, Wells Fargo, and/or Morgan Stanley for Feb, May, Aug, and Nov options expirations; and
Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec options expirations).
The goal of these Covered Calls is to either capture the quarterly dividend payment and for the stock prices to remain above the strike price at
options expiration or to have the position assigned early on the day prior to the ex-dividend date at a higher annualized-return-on-investment than would be achieved if the position was instead assigned on its options expiration date. Early assignment is unlikely in this case, so the potential return-on-investment results shown below are provided only if the position is assigned on the options expiration date.
As detailed below, a potential return-on-investment result is +2.0% absolute return (equivalent to +61.6% annualized
return for the next 12 days) if the stock is assigned on the May 6th, 2022 options expiration date.
Citigroup Inc. (C) -- New Covered Calls Position
The transactions were:
4/25/2022 Bought 400 Citigroup shares @ $50.12
4/25/2022 Sold 4 Citigroup 5/06/2022 $48.00 Call options @ $2.58
Note: the Implied Volatility of these Call options was 35.9 when this position was established.
4/29/2022 Upcoming quarterly ex-dividend of $.51 per share
A possible overall performance result (including commissions) for this
Citigroup Covered Calls position is as follows:
Covered Calls Cost Basis: $19,018.68
= ($50.12 - $2.58) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,029.32
= ($2.58 * 400 shares) - $2.68 commission
(b) Dividend Income (If Citi shares assigned at May 6th, 2022 expiration): +$204.00
= ($.51 dividend per share x 400 shares)
(c) Capital Appreciation (If Citi shares assigned at $48.00 strike price at options expiration): -$848.00
+($48.00- $50.12) * 400 shares
Absolute Return-on-Investment: +2.0%
