Established Two New Covered Calls Positions -- Examples of Early Assignment or Dividend Capture Strategy

Today, two new covered call positions were established in Dow Chemical Co. (ticker symbol DOW) and JPMorgan Chase and Co. (ticker symbol JPM) with Apr2015 expirations.  The DOW stock was purchased at $46.59 and the Call options were sold at the $46.00 strike price.  The JPM stock was purchased at $61.26 and the Call options were sold at the $60.00 strike price.

Both of these covered calls investments are strategic ones that explicitly consider the upcoming quarterly dividends with ex-dividend dates prior to the April 17th options expiration date.  Details of each covered calls position is provided below.

1. Dow Chemical Co. (DOW)

A $.42 quarterly dividend goes ex-dividend on March 27th.  Although unlikely, if the current time value (i.e. extrinsic value) of $.65 [$1.24 option premium - ($46.59 stock price - $46.00 strike price)] remaining in the short call options decay substantially below the $.42 dividend amount by March 26th (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +1.2% absolute return (equivalent to +54.1% annualized return for the next 8 days) if the stock is assigned early (day prior to Mar 27th ex-div date); OR

If Dividend Capture:  +2.1% absolute return (equivalent to +25.4% annualized return over the next 30 days) if the stock is assigned at Apr2015 expiration on April 17th.

03/19/2015 Bought 200 DOW shares @ $46.59
03/19/2015 Sold 2 DOW Apr2015 $46.00 Call options @ $1.24
Note: the price of DOW was $46.59 today when these Call options were sold.
03/27/2015 Upcoming ex-dividend of $.42 per share

Two possible overall performance results (including commissions) for this Dow Chemical Co. (DOW) covered calls position are as follows:
Stock Purchase Cost: $9,326.95
= ($46.59*200+$8.95 commission)

Net Profit:
(a) Options Income: +$237.55
= ($1.24*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Mar 27th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Apr2015 expiration): +$84.00
= ($.42 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Mar 26th): -$126.95
+($46.00-$46.59)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $46.00 at Apr2015 expiration): -$126.95
+($46.00-$46.59)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Mar 27th ex-div date): +$110.60

= (+$237.55 +$0.00 -$126.95); or

Total Net Profit (If stock assigned at $46.00 at Apr2015 expiration): +$194.60

= (+$237.55 +$84.00 -$126.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.2%

= +$110.60/$9,326.95

Annualized Return (If option exercised early): +54.1%

= (+$110.60/$9,326.95)*(365/8 days); OR

2. Absolute Return (If stock assigned at $46.00 at Apr2015 expiration): +2.1%

= +$194.60/$9,326.95

Annualized Return (If stock assigned): +25.4%

= (+$194.60/$9,326.95)*(365/30 days)

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $46.00 strike price at assignment, with 0.7% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $44.93 ($46.59 -$.42 -$1.24) provides a nice 3.6% downside protection. 


2. JPMorgan Chase Co. (JPM)

A $.40 quarterly dividend goes ex-dividend on April 1st.  Although unlikely, if the current time value (i.e. extrinsic value) of $.75 [$2.01 option premium - ($61.26 stock price - $60.00 strike price)] remaining in the short call options decay substantially below the $.40 dividend amount by March 31st (the day prior to the ex-div date), then there is a possibility that the call option owner will exercise early and will call the stock away to capture the dividend.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +1.1% absolute return (equivalent to +29.9% annualized return for the next 8 days) if the stock is assigned early (day prior to Apr 1st ex-div date); OR

If Dividend Capture:  +1.7% absolute return (equivalent to +20.9% annualized return over the next 30 days) if the stock is assigned at Apr2015 expiration on April 17th.

03/19/2015 Bought 200 JPM shares @ $61.26
03/19/2015 Sold 2 JPM Apr2015 $60.00 Call options @ $2.01
Note: the price of JPM was $61.26 today when these Call options were sold.
04/01/2015 Upcoming ex-dividend of $.40 per share

Two possible overall performance results (including commissions) for this JPMorgan Chase Co. (JPM) covered calls position are as follows:
Stock Purchase Cost: $12,260.95
= ($61.26*200+$8.95 commission)

Net Profit:
(a) Options Income: +$391.55
= ($2.01*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Apr 1st ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Apr2015 expiration): +$80.00
= ($.40 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Mar 31st): -$260.95
+($60.00-$61.26)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $46.00 at Apr2015 expiration): -$260.95
+($60.00-$61.26)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Apr 1st ex-div date): +$130.60

= (+$391.55 +$0.00 -$260.95); or

Total Net Profit (If stock assigned at $60.00 at Apr2015 expiration): +$210.60

= (+$391.55 +$80.00 -$260.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.1%

= +$130.60/$12,260.95

Annualized Return (If option exercised early): +29.9%

= (+$130.60/$12,260.95)*(365/13days); OR

2. Absolute Return (If stock assigned at $60.00 at Apr2015 expiration): +1.7%

= +$210.60/$12,260.95

Annualized Return (If stock assigned): +20.9%

= (+$210.60/$12,260.95)*(365/30 days)

As was true with the DOW position, early assignment in this JPM position would also provide a higher annualized return if the Call options are exercised early.  So, this would be the Covered Calls Advisor's preferred outcome; but either outcome provides an attractive return result.  These returns will be achieved as long as the stock is above the $60.00 strike price at assignment, with 2.1% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $58.85 ($61.26 -$.40 -$2.01) provides 3.9% of downside protection. 

------
In summary, these are both relatively conservative covered calls investments that provide nice annualized ROI potential regardless of whether they are called away early or upon the options expiration date.