Established Covered Calls in Toll Brothers Inc.

Today, a July 15th, 2022 Covered Calls buy/write limit order was placed in Toll Brothers Inc. (ticker TOL) at a net debit limit price of $39.66 per share.  The order was executed by purchasing 400 shares at $44.99 and simultaneously selling four July 15th Call options at the $40.00 strike price for $5.33 per share.  The Implied Volatility of these Call options was 42.7 when this transaction was executed which, as preferred by the Covered Calls Advisor, is above the current 28.3 of the S&P 500 Volatility Index (VIX).  In addition, there is an upcoming quarterly ex-dividend of $.20 per share on July 7th which is included in the potential return-on-investment calculations detailed below.  When this deep-in-the-money Covered Calls position was established today it had a probability of assignment on the options expiration date of 86.9%.   

Toll Brothers Inc. meets the five primary criteria currently preferred for new positions established by the Covered Calls Advisor (especially its historically low valuation ratios):

As detailed below, two potential return-on-investment results are: 

•  +0.8% absolute return (equivalent to +34.1% annualized return for the next 9 days) if the stock is assigned early (business day prior to the July 7th, 2022 ex-dividend date); OR 

• +1.3% absolute return (equivalent to +27.3% annualized return over the next 18 days) if the stock is assigned on the July 15th, 2022 options expiration date.

These returns will be achieved as long as Toll Brothers stock price is above the $40.00 strike price at options expiration.  If the stock declines below the strike price, the breakeven price of $39.46 per share ($44.99 stock purchase price - $5.33 Call options selling price - $.20 ex-dividend amount) provides a substantial 12.3% downside breakeven protection below today's stock purchase price.
 

Toll Brothers Inc. (TOL) -- New Covered Calls Position

If the stock price increases to the point where the current time value (i.e. extrinsic value) of $.34 remaining in the short Call options decays substantially (down to about $.10 or less) by July 6th, 2022 (the last business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 400 Toll Brothers shares away to capture the dividend payment.  As detailed in the Dividend Capture spreadsheet below, early assignment would still be a desirable outcome since its +34.1% annualized return-on-investment (aroi) exceeds the Covered Calls Advisor's +30.0% minimum aroi threshold for an early assignment (as shown in criteria #8 in the table below).

The simultaneous buy/write transaction was:
6/28/2022 Bought 400 Toll Brothers shares @ $44.99
6/28/2022 Sold 4 TOL July 15th, 2022 $40.00 Call options @ $5.33 per share
7/07/2022 Upcoming quarterly ex-dividend at $.20 per share

Two possible overall performance results (including commissions) for this Toll Brothers Covered Calls position are as follows:
Stock Purchase Cost Basis: $15,866.68
= ($44.99 - $5.33) *400 shares + $2.68 commission

Net Profit:
(a) Options Income: +$2,129.32
= ($5.33 *400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on July 6th, the business day prior to the July 7th ex-div date): +$0.00; or
(b) Dividend Income (If Toll Brothers shares assigned at the July 15th, 2022 expiration): +$80.00
= ($.20 dividend per share x 400 shares)

(c) Capital Appreciation (If TOL assigned early): -$1,996.00
+($40.00 -$44.99) * 400 shares; or
(c) Capital Appreciation (If Toll Brothers assigned at $40.00 strike price at expiration): -$1,996.00
+($40.00-$44.99) * 400 shares

1. Total Net Profit [If option exercised on the last business day prior to the July 7th ex-dividend date)]: +$133.32

= (+$2,129.32 options income +$0.00 dividend income -$1,996.00 capital appreciation); or

2. Total Net Profit (If TOL assigned at $40.00 at July 15th, 2022 expiration): +$213.32

= (+$2,129.32 options income +$80.00 dividend income -$1,996.00 capital appreciation)

1. Absolute Return-on-Investment (If option exercised on business day prior to ex-dividend date): +0.8%

= +$133.32/$15,866.68

Annualized Return-on-Investment (If option exercised early): +34.1%

= (+$133.32/$15,866.68) * (365/9 days); or

2. Absolute Return-on-Investment (If Toll Brothers assigned at $40.00 at July 15th expiration date): +1.3%

= +$213.32/$15,866.68

Annualized Return-on-Investment (If TOL shares assigned at $40.00 at July 15th, 2022 options expiration): +27.3%

= (+$213.32/$15,866.68) *(365/18 days)

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy.  As shown below, all nine criteria are achieved in this Toll Brothers Inc. position.