Established Covered Calls in the Archer-Daniels-Midland Company Using the Dividend Capture Strategy

Today a Covered Calls position was established in the Archer-Daniels-Midland Co. (ticker symbol ADM) at a net debit limit order of $78.35.  Two hundred shares were purchased at $82.26 and 2 February 17th, 2023 Call options were sold at $3.91 per share at the $79.00 strike price.  This strike price is 4.1% in-the-money which is consistent with my guideline of establishing Covered Calls between 2.0% and 5.0% in-the-money with my Slightly Bearish current Overall Market Meter sentiment.  This buy/write transaction occurred at a Delta of 76.3 which approximates the probability that the Call options will be in-the-money and therefore assigned on the options expiration date.     

The potential time value profit is $.65 per share [$3.91 Call options premium - ($82.26 stock purchase price - $79.00 strike price)].  In addition to this $.65 profit potential there is an upcoming quarterly ex-dividend income potential per share of $.45 (annual dividend yield of 2.2%) on February 8th, 2023.  So, the two potential return-on-investment results detailed below are: (1) the possibility of early assignment since the Feb. 8th ex-dividend is prior to the February 17th, 2023 options expiration date; and (2) the possibility that this Covered Calls position is in-the-money (and therefore assigned) on the options expiration date. The $.45 dividend is a 12.5% increase above the prior year's dividend level and is ADM's 50th consecutive year of dividend increases which signifies its entry into the Dividend Kings category which it now shares with only 45 other companies. 

ADM's Q4 2022 earnings report last week included +13.6% revenue and +28.7% earnings increases compared with the same quarter last year.  Their full fiscal year 2022 EPS was $7.85, so at today's stock purchase price of $82.26, the TTM P/E Ratio is 10.5 which compares favorably against its prior-5-year average P/E of 13.4.  Analysts' revenue estimates are flat for 2023, but ADM has beat analysts' estimates every quarter for the past 3 years.  Despite their flat revenue guidance, Wall Street analysts' average target price is $102.92 (+25.1% above today's purchase price). 

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

•  +0.8% absolute return (equivalent to +37.5% annualized return for the next 8 days) if the stock is assigned early (on the last business day prior to the February 8th, 2023 ex-dividend date); OR 

• +1.4% absolute return (equivalent to +28.3% annualized return over the next 18 days) if the stock is assigned on the February 17th options expiration date.

Archer-Daniels-Midland Co. (ADM) -- New Covered Calls Position

The buy/write transaction was:
01/31/2023 Bought 200 Archer-Daniels-Midland Co. shares @ $82.26
01/31/2023 Sold 2 ADM 2/17/2023 $79.00 Call options @ $3.91 per share
Note: the Implied Volatility of the Call options was 23.2 when this buy/write transaction was executed.
2/8/2023 Upcoming quarterly ex-dividend of $.45 per share

Two possible overall performance results (including commissions) for this Covered Calls position are as follows:
Covered Calls Net Investment: $15,671.34
= ($82.26 - $3.91) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$780.66
= ($3.91 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on Feb. 7th, the last business day prior to the February 8th ex-div date): +$0.00; or
(b) Dividend Income (If ADM stock assigned at the Feb. 17th, 2023 expiration): $90.00
= ($.45 dividend per share x 200 shares)
(c) Capital Appreciation (If ADM Call options assigned early on Feb. 7th): -$652.00
+($79.00 strike price - $82.26 stock price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $79.00 strike price at the Feb.17th options expiration): -$652.00
+($79.00 - $82.26) * 200 shares

1. Total Net Profit [If option exercised early on the last business day prior to the Feb. 8th ex-dividend date)]: +$128.66

= (+$780.66 options income +$0.00 dividend income -$652.00 capital appreciation); or

2. Total Net Profit (If stock shares assigned at $79.00 strike price at the Feb. 17th, 2023 expiration): +$218.66

= (+$780.66 options income +$90.00 dividend income -$652.00 capital appreciation)

1. Absolute Return-on-Investment (If option exercised early on Feb 7th): +0.8%

= +$128.66/$15,671.34

Annualized Return-on-Investment: +37.5%

= (+$128.66/$15,671.34) * (365/8 days); or

2. Absolute Return-on-Investment (If ADM shares assigned at $79.00 at the Feb. 17th, 2023 on the options expiration date): +1.4%

= +$218.66/$15,671.34

Annualized Return-on-Investment (If shares assigned at the 2/17/2023 expiration date): +28.3%

= (+$218.66/$15,671.34) * (365/18 days)

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 Archer-Daniels-Midland position, eight of the nine criteria were met.

Established Covered Calls in Murphy Oil Corp.

Today a Covered Calls position was established in Murphy Oil Corp. (ticker symbol MUR) when 400 shares were purchased at $43.24 and 4 February 17th, 2023 Call options were sold at $3.74 per share at the $40.00 strike price.  The net debit limit order at $39.50 was executed, so the time value was $.50 per share [$3.74 Call options premium - ($43.24 stock purchase price - $40.00 strike price)]. 

There is an upcoming quarterly ex-dividend of $.275 (annual dividend yield of 2.5%) on February 10th, 2023, so two potential return-on-investment results for this position, as detailed below, include the possibility of early assignment because the ex-dividend is prior to the February 17th, 2023 options expiration date. Given my current Overall Market Meter indicator of Slightly Bearish, an in-the-money Covered Calls position was established with a Delta of 77.9 which approximates the probability that the Call options will be in-the-money and therefore assigned on the options expiration date. 

With a market capitalization of $6.9 billion, Murphy Oil is a relatively small company as oil and gas exploration and production companies go.  It has a worldwide presence, but its primary operations are on both land and sea in the U.S. and Canada.  Murphy Oil appeared in my Energy Sector stock screener which puts it in the top 7% of Energy Sector companies.  Its primary valuation metrics are very attractive: (1) TTM (for FY2022) P/E Ratio of 7.7 and an estimated FY2023 P/E Ratio of 6.7; (2) EV/EBITDA of 4.2; (3) FCF Yield of 14%; and (4) P/TBV of 1.38 which is only one-half of the Energy Sector average.  Their most recent quarterly earnings (Q4 of 2022) reported last week showed a 42% revenue increase and a 175% profit increase compared with the same quarter last year.

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

•  +1.2% absolute return (equivalent to +41.4% annualized return for the next 11 days) if the stock is assigned early (on the last business day prior to the February 10th, 2023 ex-dividend date); OR 

• +1.9% absolute return (equivalent to +37.4% annualized return over the next 19 days) if the stock is assigned on the February 17th options expiration date.

Murphy Oil Corp. (MUR) -- New Covered Calls Position

The buy/write transaction was:
01/30/2023 Bought 400 Murphy Oil Corp. shares @ $43.24
01/30/2023 Sold 4 MUR 2/17/2023 $40.00 Call options @ $3.74 per share
Note: the Implied Volatility of the Call options was 41.5 when this buy/write transaction was executed.
2/10/2023 Upcoming quarterly ex-dividend of $.275 per share

Two possible overall performance results (including commissions) for this Covered Calls position are as follows:
Murphy Oil Covered Calls Net Investment: $15,802.68
= ($43.24 - $3.74) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,493.32
= ($3.74 * 400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on Feb. 9th, the last business day prior to the February 10th ex-div date): +$0.00; or
(b) Dividend Income (If Murphy Oil stock assigned at the Feb. 17th, 2023 expiration): $110.00
= ($.275 dividend per share x 400 shares)
(c) Capital Appreciation (If Murphy Oil Call options assigned early on Feb. 9th): -$1,296.00
+($40.00 strike price - $43.24 stock price) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $40.00 strike price at the Feb. 17th options expiration): -$1,296.00
+($40.00 - $43.24) * 400 shares

1. Total Net Profit [If option exercised early on the last business day prior to the Feb. 10th ex-dividend date)]: +$197.32

= (+$1,493.32 options income +$0.00 dividend income -$1,296.00 capital appreciation); or

2. Total Net Profit (If stock shares assigned at $40.00 strike price at the Feb. 17th, 2023 expiration): +$307.32

= (+$1,493.32 +$110.00 -$1,296.00)

1. Absolute Return-on-Investment (If option exercised early on Feb 9th): +1.2%

= +$197.32/$15,802.68

Annualized Return-on-Investment: +41.4%

= (+$197.32/$15,802.68) * (365/11 days); or

2. Absolute Return-on-Investment (If Murphy Oil shares assigned at $40.00 at the Feb. 17th, 2023 options expiration): +1.9%

= +$307.32/$15,802.68

Annualized Return-on-Investment (If shares assigned at the 2/17/2023 expiration): +37.4%

= (+$307.32/$15,802.68) * (365/19 days)

Either outcome would provide an attractive return-on-investment result for this Murphy Oil Corp. investment.  These returns will be achieved as long as the stock is above the $40.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $39.225 ($43.24 -$3.74 -$.275) provides 9.3% 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 Murphy Oil position, all nine criteria were met.

Closed Out Covered Calls Position in CVS Health Corp.

At last Friday's options expiration, two January 27th, 2023 Covered Calls in CVS Health Corp. (ticker CVS) expired out-of-the-money with the stock price below the $88.00 strike price, so the Calls expired and the 200 CVS Health shares remained in the Covered Calls Advisor Portfolio. I decided to close out this position this morning and the CVS stock was at $88.1845 when sold (above last Friday's $87.78 closing price).    

As detailed below, the return-on-investment results for this CVS Health position was: +2.0% absolute return in 20 days (equivalent to a +37.0% annualized return-on-investment).  This Covered Calls position demonstrates the benefit of selling moderately in-the-money Covered Calls in bearish markets using the Dividend Capture Strategy.  This CVS stock price changed by -1.8% since its original purchase price about 3 weeks ago, however a satisfactory profit of +2.0% absolute return-on-investment (equivalent to a +37.0% annualized return-on-investment) in 20 days was achieved with this in-the-money CVS Covered Calls position.

CVS Health Corp. (CVS) -- Covered Calls Position Closed Out

The buy/write transaction was:
1/10/2023 Bought 200 CVS shares @ $89.83
1/10/2023 Sold 2 CVS 1/27/2023 $88.00 Call options @ $2.81
1/19/2023 Quarterly ex-dividend of $.605 per share
1/27/2023 Two CVS $88.00 Calls expired out-of-the-money at options expiration, so 200 CVS shares remain in the Covered Calls Advisor Portfolio. 
1/30/2023 Closed out this CVS Covered Calls position by selling 200 CVS shares at $88.1845 per share.

The overall performance results (including commissions) for this CVS Health Covered Calls position are as follows:
CVS Covered Calls Net Investment: $17,405.34
= ($89.83 - $2.81) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$560.66
= ($2.81 * 200 shares) - $1.34 commission
(b) Dividend Income (CVS stock went ex-dividend on Jan. 19th, 2023 @ $.605 per share) = +$121.00
= ($.605 dividend per share x 200 shares)
(c) Capital Appreciation (200 CVS shares sold at $88.1845): -$329.10
+($88.1845 - $89.83) * 200 shares

Total Net Profit: +$352.56

= (+$560.66 options income +$121.00 dividend income -$329.10 capital appreciation)
 

Absolute Return-on-Investment: +2.0%

= +$352.56/$17,405.34

Annualized Return-on-Investment: +37.0%

= (+$352.56/$17,405.34) * (365/20 days)

Early Assignment of Covered Calls Position in Morgan Stanley

Early this morning I was notified by my broker (Schwab) that the two Morgan Stanley (ticker MS) February 10th, 2023 $90.00 Call options were exercised yesterday.  Morgan Stanley stock has increased from its purchase price of $93.24 eight days ago to $96.83 at the market close yesterday.  The original $.98 time value [$4.22 Call options premium - ($93.24 stock purchase price - $90.00 strike price)] had declined on yesterday's market close to $0.00 at the Call options Bid/Ask midpoint, so I was not surprised that (with 14 days remaining until the options expiration date), the owner of these Morgan Stanley Calls exercised their option to buy the 200 shares at the $90.00 strike price in order to receive today's $.775 per share ex-dividend.  

As detailed below, the return-on-investment result for this Morgan Stanley Covered Calls position was +1.1% absolute return in 8 days (equivalent to a +49.9% annualized return-on-investment).   I am fine with not receiving Morgan Stanley's $.775 ex-dividend today since the +49.9% annualized-return-on-investment achieved by early assignment exceeds the +31.2% that would have been achieved if this position was instead assigned on its February 10th options expiration date.  

Morgan Stanley (MS) -- Covered Calls Position Closed by Early Assignment
The simultaneous buy/write transaction was:
01/19/2023 Bought 200 Morgan Stanley shares @ $93.24
01/19/2023 Sold 2 Morgan Stanley 2/10/2023 $90.00 Call options @ $4.22
Note: the Implied Volatility of the Call options was 25.6 when this buy/write transaction was executed.
1/27/2023 Morgan Stanley Call options owner exercised their two Call options, so the Covered Calls position was closed out early. The two Morgan Stanley Call options expired worthless and the 200 Morgan Stanley shares were sold at the $90.00 strike price.

The overall performance results (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Net Investment: $17,805.34
= ($93.24 - $4.22) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$842.66
= ($4.22 * 200 shares) - $1.34 commission
(b) Dividend Income (Call options exercised early on Friday, January 27th, the last business day prior to the January 30th ex-div date): +$0.00
(c) Capital Appreciation (Morgan Stanley Call options assigned early on January 27th): -$648.00
+($90.00 strike price - $93.24 stock purchase price) * 200 shares

Total Net Profit: +$194.66

= (+$842.66 options income +$0.00 dividend income -$648.00 capital appreciation)

 

Absolute Return-on-Investment: +1.1%

= +$194.66/$17,805.34

Annualized Return-on-Investment: +49.9%

= (+$194.66/$17,805.34) * (365/8 days)

Established Covered Calls in Fastenal Company

Today a Covered Calls position was established in Fastenal Company (ticker symbol FAST) when 400 shares were purchased at $48.96 and 4 February 17th, 2023 Call options were sold at $2.06 per share at the $47.50 strike price.  The net debit limit order at $46.90 was executed, so the time value was $.60 per share [$2.06 Call options premium - ($48.96 stock purchase price - $47.50 strike price)]. 

There is an upcoming quarterly ex-dividend of $.35 (annual dividend yield of 2.9%) next Wednesday, February 1st, so two potential return-on-investment results for this position, as detailed below, include the possibility of early assignment because the ex-dividend is prior to the February 17th, 2023 options expiration date.  Fastenal is a Dividend Contender (between 10 and 24 consecutive years of dividend increases) since it has now achieved 23 consecutive years of increases and is likely to join with other Dividend Aristocrats when it reaches 25 consecutive years of dividend increases. 

Given my current Overall Market Meter indicator of Slightly Bearish, an in-the-money Covered Calls position was established with a Delta of 68.1.  When Slightly Bearish, my guideline is to sell between 2.0% and 5.0% in-the-money strike prices and this position is 3.1% in-the-money.

Fastenal is a leading distributor of industrial and construction supplies (including fasteners).  Their Q4 2022 EPS were reported six days ago, which increased by +7.5% compared with the same quarter last year.  Since total stock market earnings this quarter are expected to be flat versus last year, my preference is to consider companies that exceed their quarterly EPS results versus last year by at least 6.0%.  Their TTM P/E ratio is 25.7 which, since I am primarily a valuation-oriented investor, is higher than I'm normally comfortable with.  However, their prior 5-year median P/E ratio is 27.3, so the 25.7 was not a deal breaker. 

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

•  +1.3% absolute return (equivalent to +66.0% annualized return for the next 7 days) if the stock is assigned early (on the last business day prior to the February 1st ex-dividend date); OR 

• +2.0% absolute return (equivalent to +30.6% annualized return over the next 24 days) if the stock is assigned on the February 17th options expiration date.

Fastenal Company (FAST) -- New Covered Calls Position

The buy/write transaction was:
01/25/2023 Bought 400 Fastenal Co. shares @ $48.96
01/25/2023 Sold 4 Fastenal 2/17/2023 $47.50 Call options @ $2.06 per share
Note: the Implied Volatility of the Call options was 25.1 when this buy/write transaction was executed.
2/1/2023 Upcoming quarterly ex-dividend of $.35 per share

Two possible overall performance results (including commissions) for this Fastenal Covered Calls position are as follows:
Covered Calls Cost Basis: $18,762.68
= ($48.96 - $2.06) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$821.32
= ($2.06 * 400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on January 31st, the last business day prior to the February 1st ex-div date): +$0.00; or
(b) Dividend Income (If Fastenal stock assigned at the Feb. 17th, 2023 expiration): $140.00
= ($.35 dividend per share x 400 shares)
(c) Capital Appreciation (If Fastenal Call options assigned early on Feb. 1st): -$584.00
+($47.50 strike price - $48.96 stock price) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $47.50 strike price at the Feb. 17th options expiration): -$584.00
+($47.50 - $48.96) * 400 shares

Monthly Options Expiration Results through January 20th, 2023

Each month on the day after the monthly options expiration date, this summary report provides the results of all positions that have been closed out during the past month (i.e. since the prior month's options expiration date). So this post covers the period from the day after last month's December 16th, 2022 options expiration through yesterday's January 20th, 2023 monthly options expiration date.  

During this past month, the Covered Calls Advisor Portfolio held a total of fifteen Covered Calls positions.  Eleven positions were closed out at a profit and four positions were closed out at a loss. 

The specific results for each position are summarized as follows: 

• Two Covered Calls positions expired in-the-money (stock price above the strike price) on the January 20th, 2023 monthly options expiration date with the following results: 

1. Energy Select Sector SPDR ETF (XLE) -- +3.3% absolute return in 37 days (equivalent to a +32.8% annualized return-on-investment). 
   
2. Tyson Foods Inc. (TSN) -- -0.1% absolute return in 53 days (equivalent to a -1.0% annualized return-on-investment).

• Two Covered Calls positions expired in-the-money during the past month on their weekly options expiration date and were therefore assigned at their strike prices with the following results:

1. Alcoa Corporation (AA) -- +1.7% absolute return in 15 days (equivalent to a +42.4% annualized return-on-investment).
2. Bank of America Corporation (BAC) -- -5.4% absolute return in 31 days (equivalent to a -63.8% annualized return-on-investment).

• Four Covered Calls positions were closed out by early assignment on the last business day prior to their ex-dividend date with the following results:

1. Cisco Systems Inc. (CSCO) -- +0.7% absolute return in 5 days (equivalent to a +48.5% annualized return-on-investment).
   
2. EOG Resources Inc. (EOG) -- +1.4% absolute return in 10 days (equivalent to a +50.9% annualized return-on-investment).
   
3. JPMorgan Chase & Co. (JPM) -- +0.8% absolute return in 7 days (equivalent to a +41.1% annualized return-on-investment).
   
4. U.S. Bancorp (USB) -- +0.6% absolute return in 7 days (equivalent to a +40.8% annualized return-on-investment).   

• Seven Covered Calls positions were closed early based on my decision at that time to close out (i.e. unwind) the positions with the following results:

1. Freeport McMoRan Inc. (FCX) -- +1.9% absolute return in 7 days (equivalent to a +100.0% annualized return-on-investment).
2. iShares China Large-Cap ETF (FXI) -- +1.6% absolute return in 7 days (equivalent to a +82.2% annualized return-on-investment).
3. Global Payments Inc. (GPN) -- +2.1% absolute return in 15 days (equivalent to a +51.0% annualized return-on-investment).
4. Kohl's Corporation (KSS) --  -10.0% absolute return in 24 days (equivalent to a -152.2% annualized return-on-investment).
   
5. Medtronic PLC (MDT) -- +1.7% absolute return in 21 days (equivalent to a +29.9% annualized return-on-investment).
6. Mosaic Company (MOS) --  +1.6% absolute return in 5 days (equivalent to a +115.6% annualized return-on-investment).
7. Suncor Energy Inc. (SU) --  -8.2% absolute return in 33 days (equivalent to a -91.2% annualized return-on-investment).

During the past year (last 12 months) 110 of 124 positions (88.7%) in the Covered Calls Advisor Portfolio (CCAP) were closed out at a profit.  The Covered Calls Advisor Portfolio weighted average annualized-return-on-investment (aroi) was +16.2% during the past year and the average holding period for these 124 closed positions was 22.6 days.  In comparison, the benchmark S&P 500 returned -10.0% during the same prior one-year period.   

As demonstrated by these past year's results, the Covered Calls strategy can be extraordinarily beneficial during Bearish time periods such as we have experienced during the past year, and especially by selling moderately in-the-money strike prices to provide added downside protection in bearish markets.  However, be advised that these return-on-investment results by the Covered Calls Advisor Portfolio above that of the benchmark S&P 500 (i.e. +16.2% versus -10.0%) substantially exceeds that which would normally be expected over a period of several years using the Covered Calls investing strategy.  As indicated in this post made in 2021 on this blog site (Link) -- "by exploiting our Covered Calls investing "edges", we can expect to achieve (over a period of several years) an average annualized-return-on-investment above the S&P 500 benchmark index of at least 3 to 5 percentage points on an annualized-return-on-investment basis". 

Some subscribers have emailed and asked a very important question for Covered Calls investing, namely "How do you select a strike price?"  There is an academic study titled "Which Index Option Should You Sell" that I have found useful when considering this question.  This paper provides a very detailed analysis of S&P 500 index data from 1996 to 2015 and I have found it to be a helpful guideline for individual equities as well.  I encourage you to consider reading it, which is available here:(link).  The primary result from the paper is presented in Figure 4 (shown below) which I would summarize as follows: On average, the highest return-on-investment is achieved using near month (i.e. one month or less) expiration dates at strike prices about -0.5 standard deviations from the current equity price.  This -0.5 standard deviations is often equivalent to a moderately in-the-money Covered Calls strike price in the range of about 2% to 4% in-the-money.  As an example, the Excel cell formula for determining the approximate strike price for a $100 equity at -0.5 standard deviations from the current equity price with an implied volatility of 20.0 and of 30 days duration to the options expiration date would be =100*EXP(-0.5*0.20*SQRT(30/365)) which yields a result of $97.17, so a $97 strike price (i.e. about 3% in-the-money) would be selected.  This formula can be used by entering any stock price, implied volatility, and days to expiration.  I do not use this as a rule to be rigidly followed, but I have found it helpful as one factor among many considerations in my strike price decision-making process.

This Covered Calls Advisor blog is freely available to anyone interested in learning about implementing a successful Covered Calls investing strategy.  As always, I also encourage you to email me at partlow@cox.net any time you would like my feedback on your comments or questions on anything related to the Covered Calls investing strategy. 

Best Wishes and Godspeed,

Jeff Partlow
Covered Calls Advisor
partlow@cox.net