Early Assignment of Covered Calls Position in Cisco Systems Inc.

Early this morning (on 1/4/2023), the Covered Calls Advisor was notified by my broker (Schwab) that the three Cisco Systems Inc. (ticker CSCO) January 13th, 2023 $46.00 Call options were exercised yesterday--Note: it is commonplace with early assignments that they normally occur on the last business day prior to the ex-dividend date.  Cisco shares increased from its purchase price of $47.09 five days ago to $47.94 at the market close yesterday.  The Delta (which is a good approximation of the probability of assignment at the options expiration date) had increased from 71.4 when the position was originally established to 91.0 at yesterday's market close. The original $.31 time value [$46.00 strike price - ($47.09 stock purchase price - $1.40 Call options price sold)] had declined on yesterday's market close to only $0.03 (at the midpoint of the $1.92/$2.02 Bid/Ask spread), so as expected (and with 9 days remaining until the options expiration date), the owner of the Calls exercised their option to buy the 300 Cisco shares at the $46.00 strike price in order to receive today's $.38 per share ex-dividend.  

As detailed below, the return-on-investment results for this Cisco Systems Inc. Covered Calls position was: +0.7% absolute return in 5 days (equivalent to a +48.5% annualized return-on-investment).  I was not disappointed in not receiving today's ex-dividend.  In fact, I actually preferred this early assignment outcome since, as is normally the case when using the nine criteria of my Dividend Capture Strategy, the annualized-return-on-investment (aroi) achieved of +48.5% exceeded the maximum aroi of +36.4% if this Covered Calls position would instead get assigned on its January 13th, 2023 options expiration date.       
 

Cisco Systems Inc. (CSCO) -- Covered Calls Position Closed by Early Assignment
The simultaneous buy/write transaction was:

12/30/2022 Bought 300 Cisco Systems Inc. shares @ $47.09
12/30/2022 Sold 3 Cisco 1/13/2023 $46.00 Call options @ $1.40.  Note: the Implied Volatility of these Calls was 19.1 when this transaction was executed.
1/3/2023 Cisco Call options owner exercised their options, so the Covered Calls position was closed out early. The 3 CSCO Calls expired worthless and the 300 Cisco shares were sold at the $46.00 strike price.

The overall performance result (including commissions) for this Cisco Systems Covered Calls position was as follows:
Covered Calls Net Investment: $13,709.01
= ($47.09 - $1.40) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$417.99
= ($1.40 * 300 shares) - $2.01 commission
(b) Dividend Income: +$0.00

(c) Capital Appreciation [300 CSCO shares assigned on 1/3/2023 (the day prior to the options expiration date) at the $46.00 per share strike price]: -$327.00
+($46.00 - $47.09) * 300 shares

Total Net Profit achieved: +$90.99

= (+$417.99 options income +$0.00 dividend income -$327.00 capital appreciation)
 

Absolute Return-on-Investment: +0.7%

= +$90.99/$13,709.01

Annualized Return-on-Investment: +48.5%

= (+$90.99/$13,709.01) * (365/5 days) 

 

Covered Calls Established in EOG Resources Inc.

This afternoon I established a buy/write net debit limit order for a January 20th, 2023 $117.20 strike price Covered Calls position in EOG Resources Inc. (ticker EOG).  My net debit limit order price (stock price minus Call options price) was $115.58.  I often place my limit orders below the current price to try to get a better transaction execution price than what the stock and Calls are trading for at the time my order is placed.  Plus, the Implied Volatility of the options prices often increases somewhat as the stock price declines, in which case an enhanced options premium is received which results in a higher potential annualized return-on-investment than would have occurred if a buy/write market order was placed instead of a limit order.  This limit order approach means that frequently these day orders are never executed, but it did execute for this EOG Covered Calls position when the stock price had declined substantially today (by 4.2% compared with its prior market closing price last Friday).

Two hundred shares were purchased at $124.13 and two January 20th, 2023 $117.20 strike price Call options were sold at $8.55 per share.  The corresponding extrinsic value (i.e. time value) was $1.62 per share [$8.55 Call options premium - ($124.13 stock purchase price - $117.20 strike price)].   In addition to this $1.62 profit potential from the Calls, there is an intervening ex-dividend prior to the options expiration date on January 13th) at $.825 per share (2.7% annual dividend yield) which is included in the potential return-on-investment results shown below.  The Implied Volatility of the Call options was 40.3 and the Delta was approximately 73.9 when this position was established.  Also as preferred, there is no quarterly earnings report prior to the options expiration date.

Some key numbers for this EOG Resources Inc. Covered Calls position are:
Covered Calls Net Investment: $23,117.34
= ($124.13 - $8.55) x 200 shares + $1.34 commission

1. If Assigned Early on the Day Before the January 13th Ex-Dividend Date:
Time Value Profit: $322.66 = $1.62 time value x 200 shares - $1.34 commission
Days Until the January 13th, 2023 Options Expiration: 10

Absolute Return-on-Investment if Assigned Early (on day prior to ex-dividend date): +1.4%
= ($322.66 profit/$23,117.34 net investment)
Annualized Return-on-Investment (If Assigned Early): +50.9%
= ($322.66 profit/$23,117.34) x (365 days/10 days) 

2. If Assigned on the January 20th, 2023 Options Expiration Date:
Time Value Profit: $322.66 = $1.62 time value x 200 shares - $1.34 commission
Dividend Income if Assigned on the Options Expiration Date: $165.00 = $.825 per share x 200 shares
Total Potential Profit: $487.66 = $322.66 time value profit + $165.00 dividend income
Days Until the January 20th, 2023 Options Expiration: 18 

Absolute Return-on-Investment (If Assigned at the Jan. 20th Expiration): +2.1%
= $487.66/$23,117.34
Annualized Return-on-Investment (If Assigned at the Jan. 20th Expiration): +42.8%
=($487.66/$23,117.34) x (365 days/18 days)


Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net

 

Closed Out Covered Calls Position in Medtronic PLC

At last Friday's options expiration, two December 30th, 2022 Covered Calls in Medtronic PLC (ticker MDT) expired out-of-the-money with the stock price below the $78.00 strike price, so the Calls expired and the 200 Medtronic shares remained in the Covered Calls Advisor Portfolio. I decided to close out this position this morning when Medtronic's stock was at $78.03 (above last Friday's $77.72 closing price).    

As detailed below, the return-on-investment results for this Medtronic PLC position was: +1.7% absolute return in 21 days (equivalent to a +29.9% 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 Medtronic stock price declined by 2.3% since its original purchase price 3 weeks ago, however a satisfactory profit of +1.7% absolute return-on-investment (equivalent to a +29.9% annualized return-on-investment) in 21 days was achieved with this in-the-money Medtronic Covered Calls position.

Medtronic PLC (MDT) -- Covered Calls Position Closed Out
The buy/write transaction was:
12/13/2022 Bought 200 Medtronic PLC shares @ $79.84
12/13/2022 Sold 2 MDT 12/30/2022 $78.00 Call options @ $2.46
Note 1: the Implied Volatility of the Calls was 20.6 when this transaction executed.
Note 2: the Time Value (aka Extrinsic Value) in the Call options was $.62 per share = [$2.46 Call options premium - ($79.84 stock price - $78.00 strike price)]
12/20/2022 Quarterly ex-dividend of $.68 per share
12/30/2022 Two MDT $78.00 Call options expired out-of-the-money and 200 shares remain in the Covered Calls Advisor Portfolio
1/03/2023 Sold 200 Medtronic shares @ $78.03 per share to close out this Covered Calls position.

The overall performance results (including commissions) for this Medtronic Covered Calls position are as follows:
Covered Calls Net Investment: $15,477.34
= ($79.84 - $2.46) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$492.00
= ($2.46 * 200 shares)
(b) Dividend Income: +$136.00
= ($.68 dividend per share x 200 shares)
(c) Capital Appreciation (MDT shares sold at $78.03 per share on Jan. 3rd, 2023): -$362.00
+($78.03 - $79.84) * 200 shares

Total Net Profit: +$266.00

= (+$492.00 options income +$136.00 dividend income -$362.00 capital appreciation)
 

Absolute Return-on-Investment: +1.7%

= +$266.00/$15,477.34

Annualized Return-on-Investment: +29.9%
= (+$266.00/$15,477.34) * (365/21 days)

Overall Market Meter Changes from Bearish to Slightly Bearish

Today, the Covered Calls Advisor evaluated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The prior rating done 3 months ago was Bearish and today's rating improves to Slightly Bearish.  Of the seven factors used in the analysis, they can be categorized as macroeconomic, momentum, value, and growth metrics as follows:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).

The current Market Meter average of 1.57 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 1.50 to 2.50).    

This 1.57 total is slightly higher than the 1.43 of the prior analysis done 3 months ago, but there were three changes (two factors improved, one declined, and 4 remained unchanged) to individual factors as follows:
- Price Trend improved one level from Very Bearish to Bearish,
- P/E Ratio improved one level from Very Bearish to Bearish, and
- Future Earnings Growth declined one level from Neutral to Slightly Bearish

So what is our current Covered Calls investing strategy?  Based on the Covered Calls Advisor's "Slightly Bearish" Overall Market Meter (see right sidebar on this blog's homepage here), the corresponding strategy is to "on-average establish Covered Call positions that are between 2% and 5% in-the-money and with short-term (i.e. one month or less) option expiration dates".    

The Federal Reserve's policy of Quantitative Easing (i.e. QE) during recent years provided a consistent tailwind to the stock market's performance.  Since the Fed has now reversed policies to: (1) regular increases in the Federal Funds rate to try to eventually return the rate of inflation back to their 2% target, which is now beginning to affect, as expected, a significant deceleration in corporate earnings growth rates compared with their growth rates the past two years; and (2) Quantitative Tightening which will likely have the effect of being a headwind (the opposite effect that the QE tailwind was) for the stock market.  In addition to "don't fight the Fed" and the current "Slightly Bearish" Overall Market Meter sentiment, a third fundamental factor of concern is the current nine consecutive monthly declines in the U.S. Leading Economic Indicators (LEI) Index.  In September 2022, LEI flashed its first recession "warning signal" which normally precedes the onset of a recession by an average of roughly 6 months.  So, these 3 fundamental stock market headwinds most likely portend a continuing difficult investing environment during the first half of 2023.  So going forward, I plan to comply with my "Slightly Bearish" guideline to "on-average establish Covered Call positions that are between 2% and 5% in-the-money and with short-term (i.e. one month or less) options expiration dates".  

Finally, I normally update my Overall Market Meter quarterly, but my current sense is that every two months would be preferable this year, so I am marking my calendar to conduct the next Overall Market Meter update in early March 2023. 

Wishing a Happy, Healthy, and Prosperous New Year to All of You,
Jeff Partlow (Covered Calls Advisor)
partlow@cox.net