On July 19th, 2021 the Covered Calls Advisor established a Covered Calls position in Morgan Stanley at the August 6th, 2021 $86.00 strike price. The price of the 200 Morgan Stanley shares has increased from the purchase price of $88.42 to $95.775 this afternoon. There was only $.055 time value per share remaining in the Call options but 7 days remaining until the ex-dividend of $.70 per share and 16 days remaining until the Aug. 6th options expiration date.
The Covered Calls Advisor looked at the time value to roll-up the existing Calls to various higher strike prices and decided to roll up from the original $86.00 strike to the $91.00 strike at the same Aug. 6th, 2021 options expiration date. A vertical debit spread transaction was executed at a net debit of $4.75 ($9.83 - $5.08) per share -- so $.25 time value per share potential additional net profit ($91.00 new strike price - $86.00 original strike price - $4.75 net debit) was added to the Covered Calls position. In addition, there remains a possibility that the $.70 dividend will be captured if the stock continues to rise somewhat higher and the time value declines to about $.15 or less on the day prior to next Friday's ex-dividend date.
As detailed below, two potential return-on-investment results are:
- +1.6% absolute return (equivalent to +59.2% annualized return for 10 days) if the stock is assigned early (business day prior to the July 29th ex-dividend date); OR
- +2.4% absolute return (equivalent to +47.0% annualized return over a 19 days investment) if the stock is assigned on the August 6th options expiration date.
Morgan Stanley (MS) -- Continuation of Covered Calls Position by Roll-Up Transaction
The buy/write transaction was:
07/19/2021 Bought 200 Morgan Stanley shares @ $88.42
07/19/2021 Sold 2 Morgan Stanley 08/06/2021 $86.00 Call options @ $3.56
Note: the Implied Volatility of the Call options was 26.8 when this buy/write transaction was executed.
07/22/2021 Roll-up MS Covered Calls position from the $86.00 to the $91.00 strike price at the identical Aug. 6th, 2021 expiration date at a net debit price of $4.75.
07/29/2021 Upcoming quarterly ex-dividend of $.70 per share
Two possible overall performance results (including commissions) for this rolled-up Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $16,973.34
= ($88.42 - $3.56) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: -$240.68
= ($3.56 - $9.83 + $5.08) * 200 shares - $2.68 commissions
(b) Dividend Income (If option exercised early on July 28th, the business day prior to the July 29th ex-div date): +$0.00; or
(b) Dividend Income (If Morgan Stanley stock assigned at Aug. 6th, 2021 expiration): +$140.00
= ($.70 dividend per share x 200 shares)