An April 6th, 2023 Covered Calls buy/write limit order was executed this morning in U.S. Bancorp (ticker USB) at a net debit price of $31.80 per share. Four hundred shares were purchased at $34.65 and four April 6th, 2023 $33.00 strike price Call options were sold at $2.85 per share. The corresponding extrinsic value (i.e. time value) was $1.20 per share [$2.85 Call options premium - ($34.65 stock purchase price - $33.00 strike price)]. There is an intervening ex-dividend prior to the options expiration date on March 30th) at $.48 per share (a 5.5% annual dividend yield) which is included in the potential return-on-investment results shown below.
U.S. Bancorp is the fifth largest bank in the U.S. by total assets and its 25% price decline during this past week seems overdone given its size and quality. Since the bank failure crisis of the past few days and the dramatic decline in all bank stock prices, today it seems that prices are beginning to stabilize somewhat but the Implied Volatility of their Call options remains very elevated. For example, the Implied Volatility of the U.S. Bancorp Calls sold this morning was very high at 56.5 when this position was established, so the two potential annualized return-on-investment results as shown below for this Covered Calls position are also very high.
Some key numbers for this U.S. Bancorp Covered Calls position are:
Covered Calls Net Investment: $12,722.68
= ($34.65 - $2.85) x 400 shares - $2.68 commissions
1. If Assigned Early on the Day Prior to the Ex-Dividend Date:
Total Potential Profit: $477.32
= $1.20 time value x 400 shares - $2.68 commissions
Days Until the March 30th, 2023 Ex-Dividend Date: 14
Absolute Return-on-Investment: +3.8%
= $477.32 time value profit /$12,772.68 net investment
Annualized Return-on-Investment if Assigned Early: +97.8%
= ($477.32/$12,772.68) x (365/14 days)
2. If Assigned on the April 6th, 2023 Options Expiration Date:
Dividend Income: $192.00
= $.48 per share x 400 shares
Total Potential Profit: $669.32
= $477.32 time value profit + $192.00 dividend income
Days Until the April 6th, 2023 Options Expiration: 22
Absolute Return-on-Investment if Assigned at Expiration: +5.3%
= $669.32 total profit potential /$12,772.68 net investment
=Annualized Return-on-Investment if Assigned at Expiration: +87.3%
= ($669.32 total profit /$12,772.68) x (365/22 days)
Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net
