Covered Calls Position Established in Exxon Mobil Corp.
Today, a new covered calls position was established in Exxon Mobil Corporation (ticker symbol XOM) with an Aug2015 expiration. The Exxon Mobil stock was purchased at $78.96 after today's disappointing earnings release when the stock price had declined by almost 5% from yesterday's closing price. The Aug2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $78.00 strike price for $1.80 each.
This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Aug 11th) prior to the August 21st options expiration date. Details of this position is provided below.
1. Exxon Mobil Corp. (XOM)
A $.73 quarterly dividend goes ex-dividend on August 11th. Although unlikely, if the current time value (i.e. extrinsic value) of $.84 [$1.80 option premium - ($78.96 stock price - $78.00 strike price)] remaining in the short call options decay substantially below the $.73 dividend amount by August 10th (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: +0.9% absolute return (equivalent to +31.2% annualized return for the next 11 days) if the stock is assigned early (the day prior to Aug 11th ex-div date); OR
If Dividend Capture: +1.9% absolute return (equivalent to +29.6% annualized return over the next 23 days) if the stock is assigned at Aug2015 expiration on August 21st.
07/31/2015 Bought 200 XOM shares @ $78.96
07/31/2015 Sold 2 XOM Aug2015 $78.00 Call options @ $1.80
Note: the price of XOM was $78.96 today when these Call options were sold.
08/11/2015 Upcoming ex-dividend of $.73 per share
Two possible overall performance results (including commissions) for this Exxon Mobil Corp. (XOM) covered calls position are as follows:
Stock Purchase Cost: $15,800.95
= ($78.96*200+$8.95 commission)
Net Profit:
(a) Options Income: +$349.55
= ($1.80*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Aug 11th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Aug2015 expiration): +$146.00
= ($.73 dividend per share x 200 shares)
(c) Capital Appreciation (If stock assigned early on Aug 10th): -$200.95
+($78.00-$78.96)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $78.00 at Aug2015 expiration): -$200.95
+($78.00-$78.96)*200 - $8.95 commissions
Total Net Profit (If option exercised on day prior to Aug 11th ex-div date): +$148.60
= (+$349.55 +$0.00 -$200.95); or
Total Net Profit (If stock assigned at $78.00 at Aug2015 expiration): +$294.60
= (+$349.55 +$146.00 -$200.95)
1. Absolute Return (If option exercised on day prior to ex-div date): +0.9%
= +$148.60/$15,800.95
Annualized Return (If option exercised early): +31.2%
= (+$148.60/$15,800.95)*(365/11 days); OR
2. Absolute Return (If stock assigned at $78.00 at Aug2015 expiration): +1.9%
= +$294.60/$15,800.95
Annualized Return (If stock assigned): +29.6%
= (+$294.60/$15,800.95)*(365/23 days)
Either outcome would provide a very good return. These returns will be achieved as long as the stock is above the $78.00 strike price at assignment.
