This position uses the Covered Calls Advisor's Dividend Capture Strategy. Target has an upcoming quarterly ex-dividend of $1.12 per share (a 2.9% annual dividend yield) that goes ex-dividend on November 20th, 2024 which is prior to the November 29th options expiration date. Importantly, they also announce their Q3 2025 earnings on November 20th. I normally avoid holding Covered Calls positions during a company's earnings report, but given the very attractive Implied Volatility of 52.7 (and the accompanying high annualized return-on-investment potential) for this particular Call option, I feel the inflated volatility provided a reasonable risk/reward set-up. This dividend is included in the detailed potential return-on-investment calculations below. Either an early assignment on the day prior to the ex-dividend date or on the November 29th, 2024 options expiration date would be desirable to the Covered Calls Advisor given the attractive potential annualized return-on-investment upon assignment for either outcome.
As detailed below, two potential return-on-investment results are:
- +2.2% absolute return (equivalent to +132.6% annualized return-on-investment for the next 6 days) in the relatively unlikely event that the stock price moves substantially higher and is assigned early (business day prior to the November 20th ex-dividend date); OR
- +3.0% absolute return (equivalent to +72.2% annualized return-on-investment over the next 15 days) if the stock is assigned on the November 29th options expiration date.
The simultaneous buy/write transaction was:
11/14/2024 Bought 200 Target Corp. shares @ $154.41.
11/14/2024 Sold 2 Target 11/29/2024 $145.00 Call options @ $12.51 per share.
Note: The Implied Volatility of the Call options was 52.7 when this position was transacted.
11/20/2024 Upcoming quarterly ex-dividend of $1.12 per share.
Two possible overall performance results (including commissions) for this Target Corporation Covered Calls position are as follows:
Covered Calls Cost Basis: $28,381.34
= ($154.41 - $12.51) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$2,500.66
= ($12.51 * 200 shares) - $1.34 commission
(b) Dividend Income (If options exercised early on Nov. 19th, the business day prior to the Nov. 20th, 2024 ex-div date): +$0.00; or
(b) Dividend Income (If Target's stock assigned on the Nov. 29th, 2024 options expiration): +$224.00
= ($1.12 dividend per share x 200 shares)
+($145.00 strike price - $154.41 stock purchase price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $145.00 strike price at options expiration): -$1,882.00
+($145.00 - $154.41) * 200 shares
Either outcome provides an exceptional return-on-investment result for this Target Corp. Covered Calls investment. These returns will be achieved as long as the stock is above the $145.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $140.78 = ($154.41 stock price - $12.51 Call options price - $1.12 dividend) provides a substantial 8.8% downside protection below today's stock purchase price.
