Covered Calls Position Established in Potash Corp of Saskatchewan Inc.

Today, a new covered calls position was established in Potash Corp of Saskatchewan Inc. (ticker symbol POT) with an Oct2015 expiration.  The Potash stock was purchased at $20.31 and the Oct2015 Call options were simultaneously sold (i.e. a single buy-write transaction was made) at the $20.00 strike price for $.73 each.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date (Oct 8th) prior to the October 16th options expiration date.  Details of this position is provided below.

1. Potash Corp of Saskatchewan Inc. (POT)

A $.38 quarterly dividend goes ex-dividend on Oct 8th.  If the current time value (i.e. extrinsic value) of $.42 [$.73 option premium - ($20.31 stock price - $20.00 strike price)] remaining in the short call options decays substantially (from an increase in the price of Potash stock) by Oct 7th (the day prior to the ex-div date), then it is possible that the call option owner will exercise his/her option and will call the stock at the $20.00 strike price to capture the dividend.  

Either early assignment or assignment at the Oct2015 options expiration date (Oct 16th) would provide excellent return-on-investment results:

If Early Assignment: +1.6% absolute return (equivalent to +72.4% annualized return for the next 8 days) if the stock is assigned early (the business day prior to the Oct 8th ex-div date); OR

If Dividend Capture:  +3.5% absolute return (equivalent to +74.2% annualized return over the next 17 days) if the stock is assigned at Oct2015 expiration on October 16th.

The transactions are:
09/30/2015 Bought 200 POT shares @ $20.31
09/30/2015 Sold 2 POT Oct2015 $20.00 Call options @ $.73
10/08/2015 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this Potash Corp covered calls position are as follows:
Stock Purchase Cost: $4,070.95
= ($20.31*200+$8.95 commission)

Net Profit:
(a) Options Income: +$135.55
= ($.73*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Oct 8th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$76.00
= ($.38 dividend per share x 200 shares)

(c) Capital Appreciation [If stock assigned early on Oct 7th (business day prior to Oct 8th ex-div date)]: -$70.95
+($20.00-$20.31)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $20.00 at Oct2015 expiration): -$70.95
+($20.00-$20.31)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Oct 8th ex-div date): +$64.60

= (+$135.55 +$0.00 -$70.95); or

Total Net Profit (If stock assigned at $20.00 at Oct2015 expiration): +$140.60

= (+$135.55 +$76.00 -$70.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +1.6%

= +$64.60/$4,070.95

Annualized Return (If option exercised early): +72.4%

= (+$64.60/$4,070.95)*(365/8 days); or

2. Absolute Return (If stock assigned at $20.00 at Oct2015 expiration): +3.5%

= +$140.60/$4,070.95

Annualized Return (If stock assigned): +74.2%

= (+$140.60/$4,070.95)*(365/17 days)

Either outcome would provide an excellent return.  These returns will be achieved if the stock is above the $20.00 strike price at the Oct2015 options expiration.