Covered Calls Position Established in General Motors Co.

Today, a new covered calls position was established in General Motors Co. (ticker symbol GM) with a Sept2015 expiration.  The General Motors stock was purchased at $30.93 and the Sep2015 Call options were simultaneously (i.e. a single buy-write transaction was made) sold at the $30.00 strike price for $1.45 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (likely on Sept 7th) prior to the September 18th options expiration date.  Details of this position is provided below.

1. General Motors Co (GM)

A $.36 quarterly dividend goes ex-dividend around September 7th (note: on Sept 2nd, GM declared a $.36 quarterly dividend with an ex-div date of Sept 10th).  Although unlikely, if the current time value (i.e. extrinsic value) of $.52 [$1.45 option premium - ($30.93 stock price - $30.00 strike price)] remaining in the short call options decay substantially below the $.36 dividend amount by September 6th (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: +1.5% absolute return (equivalent to +19.1% annualized return for the next 28 days) if the stock is assigned early (the day prior to Sept 7th ex-div date); OR

If Dividend Capture:  +2.6% absolute return (equivalent to +24.6% annualized return over the next 39 days) if the stock is assigned at Sep2015 expiration on Sept 18th.

08/11/2015 Bought 300 GM shares @ $30.93
08/11/2015 Sold 3 GM Sep2015 $30.00 Call options @ $1.45
09/10/2015 Upcoming ex-dividend of $.36 per share

Two possible overall performance results (including commissions) for this General Motors (GM) covered calls position are as follows:
Stock Purchase Cost: $9,287.95
= ($30.93*300+$8.95 commission)

Net Profit:
(a) Options Income: +$423.80
= ($1.45*300 shares) - $11.20 commissions
(b) Dividend Income (If option exercised early on day prior to Sept 7th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Sep2015 expiration): +$108.00
= ($.36 dividend per share x 300 shares)

(c) Capital Appreciation (If stock assigned early on Sept 6th): -$287.95
+($30.00-$30.930)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $30.00 at Sep2015 expiration): -$287.95
+($30.00-$30.93)*300 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Sept 7th ex-div date): +$135.85

= (+$423.80 +$0.00 -$287.95); or

Total Net Profit (If stock assigned at $30.00 at Sep2015 expiration): +$243.85

= (+$423.80 +$108.00 -$287.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.5%

= +$135.85/$9,287.95

Annualized Return (If option exercised early): +19.1%

= (+$135.85/$9,287.95)*(365/28 days); OR

2. Absolute Return (If stock assigned at $30.00 at Sep2015 expiration): +2.6%

= +$243.85/$9,287.95

Annualized Return (If stock assigned): +24.6%

= (+$243.85/$9,287.95)*(365/39 days)

Either outcome would provide a good return on investment.  These returns will be achieved as long as the stock is above the $30.00 strike price at expiration.