Covered Calls Established in Energy Select Sector SPDR Fund ETF

A Covered Calls position was established in the Energy Select Sector SPDR Fund ETF (ticker XLE), with a January 6th, 2023 weekly options expiration date. Three hundred shares of the Energy Select Sector SPDR Fund were purchased at $84.85 and three 1/6/2023 Call options were sold at $4.57 per share at the $81.00 strike price.  The Implied Volatility of these Calls was 26.8 when this position was transacted which, as preferred by the Covered Calls Advisor, is above that of the S&P 500 Volatility Index (i.e. VIX) which is currently at 22.1.

The time value was $.72 per share [$81.00 strike price - ($84.85 share price - $4.57 options premium)] when this net debit buy/write limit order transaction was executed.  XLE also goes ex-distribution in 4 days on December 19th, 2022.  The exact amount of the XLE distribution is not pre-announced, but based on prior quarterly distributions, I estimate it will be approximately $.85 per share.  Note: the actual ex-distribution amount turned out to be $.8596. 

Given my current Bearish Overall Market Meter rating, the current strategy is to established Covered Calls between 4.0% and 7.0% in-the-money.  The Delta was 75.3 when this position was established, which is a good approximation of the probability that XLE will close in-the-money (and therefore be assigned at the strike price) on the January 6th options expiration date.  This corresponds to a 4.8% [($84.85 stock purchase price - $81.00 strike price)/$81.00 strike price] in-the-money position which is within the desired 4% to 7% in-the-money range given my current bearish viewpoint.

As detailed below, a potential return-on-investment result is +0.9% absolute return (equivalent to +81.1% annualized return for the next 4 days) in the unlikely event that the stock is assigned early tomorrow on December 16th (the last business day prior to the December 19th ex-distribution date); OR +2.0% absolute return (equivalent to +31.1% annualized return over the next 23 days) if the stock is assigned on the January 6th, 2023 options expiration date.

Energy Select Sector SPDR Fund ETF (XLE) -- New Covered Calls Position
The buy/write transaction today was as follows:
12/15/2022 Bought 300 Energy Select Sector SPDR Fund ETF shares @ $84.85 per share
12/15/2022 Sold 3 XLE 12/6/2022 $81.00 Call options @ $4.57 per share
12/19/2022 Upcoming quarterly ex-distribution estimated at $.8596 per share

Two possible overall performance results (including commissions) for this Energy Select Sector SPDR Fund ETF Covered Calls position are as follows:
Covered Calls Net Investment: $24,086.01
= ($84.85 - $4.57) * 300 shares + $2.01 commissions

Net Profit Components:
(a) Options Income: +$1,368.99
= ($4.57 * 300 shares) - $2.01 commissions
(b) Distribution Income (If option exercised tomorrow on the last business day prior to the Dec. 19th ex-distribution date): +$0.00; or
(b) Distribution Income (If XLE shares assigned at the January 6th, 2023 options expiration): +$257.88
= ($.8596 distribution per share x 300 shares)
(c) Capital Appreciation (If XLE shares assigned early): -$1,155.00
+($81.00 - $84.85) * 300 shares ;or
(c) Capital Appreciation (If shares are in-the-money and therefore assigned at the $81.00 strike price at options expiration): -$1,086.00
+($81.00 - $84.85) * 300 shares

1. Total Net Profit [If options exercised on Dec. 16th (last business day prior to the Dec. 19th ex-distribution date)]: +$213.99

= (+$1,368.99 options income +$0.00 distribution income - $1,155.00 capital appreciation); or

2. Total Net Profit (If XLE shares assigned at $81.00 strike price at the January 6th, 2023 expiration): +$471.87

= (+$1,368.99 options income + $257.88 distribution income - $1,155.00 capital appreciation)

1. Absolute Return-on-Investment [If XLE Call options exercised on final business day prior to ex-distribution date]: +0.9%

= +$213.99/$24,086.01

Annualized Return-on-Investment (If options exercised early): +81.1%

= (+$213.99/$24,086.01) * (365/4 days); or

2. Absolute Return-on-Investment (If XLE shares assigned at $81.00 strike price on the Jan. 6th, 2023

options expiration date): +2.0%

= +$471.87/$24,086.01

Annualized Return-on-Investment (If XLE shares assigned at $81.00 at Jan. 6th, 2023 expiration): +31.1%

= (+$468.99/$24,086.01) * (365/23 days)

These returns will be achieved as long as the XLE price is above the $81.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $79.43 ($84.85 -$4.57 -$.85) provides 6.4% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of nine criteria to evaluate potential Covered Calls using a Dividend Capture Strategy.  The minimum threshold desired to establish a position is that at least eight of these nine criteria must be achieved.  As shown in the table below, all nine criteria are met for this Energy Select Sector SPDR Fund ETF Covered Calls position.