Today a Covered Calls position was established in Exxon Mobil Corporation (ticker symbol XOM) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $85.73 and 2 May 20th, 2022 Call options were sold at $6.51 at the $80.00 strike price. The corresponding extrinsic value (i.e. time value) was $.78 per share
[$6.51 Call options premium - ($85.73 stock purchase price - $80.00 strike price)], all of which will be profit if the stock is assigned (either by early assignment on the day prior to the ex-dividend date or at the May 20th options expiration date).
At today's purchase price, the upcoming ex-dividend of $.88 on May 12th has a 4.1% annualized dividend yield. So, this short-term (only 19 days until options expiration) position is established to take advantage of the potential to achieve a high annualized return-on-investment in a position that meets all nine criteria of the Covered Calls Advisor's Dividend Capture Strategy (see table at end of this post). In addition, Exxon meets the four primary criteria required by the Covered Calls Advisor during this current bearish market:
- Good valuation -- the trailing twelve months EV/EBITDA ratio is only 9.5
- Appear in one of my stock screeners -- Exxon appears in the Covered Calls Advisor's Energy Sector stock screener
- Estimated FY2022 EPS greater than FY2021 actual -- FY2021 actual was $5.38 per share and the FY2022 estimate is $9.16 per share
- Analysts' average target price at least 10% above the current stock price -- their current average target price of $94.36 is 10.1% above today's purchase price.
The Implied Volatility of the Call options was 38.7 which, as desired by the Covered Calls Advisor, is greater than the current 34.8 of the S&P 500 Volatility Index (i.e. VIX). Two potential return-on-investment results for this position are
highlighted below (including the possibility of early assignment since
the ex-dividend is prior to the May 20th options expiration date).
Given the Covered Calls Advisor's current cautious overall market
sentiment, a moderately in-the-money Covered Calls position was established--the Delta was 78.8 which approximates the probability that the stock will be in-the-money, and therefore assigned (i.e. sold), on the May 20th options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.0% absolute return (equivalent to +35.6% annualized return for the next 10 days) if the stock is assigned early (business day prior to the May 12th ex-dividend date); OR
- +2.1% absolute return (equivalent to +40.1% annualized return over the next 19 days) if the stock is assigned on the May 20th options expiration date.
Exxon Mobil Corporation (XOM) -- New Covered Calls Position
The buy/write transaction was:
05/2/2022 Sold 2 XOM 5/20/2022 $80.00 Call options @ $6.51
05/12/2022 Upcoming quarterly ex-dividend of $.88 per share
Two possible overall performance results (including commissions) for this Exxon Mobil Corp. Covered Calls position are as follows:
Covered Calls Cost Basis: $15,845.34
= ($85.73 - $6.51) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,300.66
= ($6.51 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on May 11th, the business day prior to the May 12th ex-div date): +$0.00; or
(b) Dividend Income (If Exxon Mobil stock assigned at May 20th, 2022 options expiration; so the $.88 dividend is captured): +$176.00
= ($.88 dividend per share x 200 shares)
+($80.00 - $85.73) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $80.00 strike price at options expiration): -$1,146.00
+($80.00 - $85.73) * 200 shares
Either outcome provides an attractive return-on-investment result for this Exxon Mobil investment. These returns will be achieved as long as the stock is above the $80.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $78.34 ($85.73 -$6.51 -$.88) provides an 8.6% downside protection below today's stock purchase price.
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 Exxon Mobil Corporation position, all nine criteria are met.
