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

Today, two new covered call positions were established in Dow Chemical Co. (ticker symbol DOW) and JPMorgan Chase and Co. (ticker symbol JPM) with Oct2015 expirations.  The DOW stock was purchased at $43.29 and the Call options were sold at the $42.00 strike price.  The JPM stock was purchased at $60.93 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 October 16th 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 September 28th.  Although unlikely, if the current time value (i.e. extrinsic value) of $.75 [$2.04 option premium - ($43.29 stock price - $42.00 strike price)] remaining in the short call options decay substantially below the $.42 dividend amount by September 27th (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 +55.6% annualized return for the next 10 days) if the stock is assigned early (day prior to Sept 28th ex-div date); OR

If Dividend Capture:  +2.5% absolute return (equivalent to +31.2% annualized return over the next 29 days) if the stock is assigned at Oct2015 expiration on October 16th.

09/18/2015 Bought 200 DOW shares @ $43.29
09/18/2015 Sold 2 DOW Oct2015 $42.00 Call options @ $2.04

09/28/2015 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: $8,666.95
= ($43.29*200+$8.95 commission)

Net Profit:
(a) Options Income: +$397.55
= ($2.04*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Oct 28th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$84.00
= ($.42 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Sept 27th): -$266.95
+($42.00-$43.29)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $42.00 at Oct2015 expiration): -$266.95
+($42.00-$43.29)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Sept 28th ex-div date): +$130.60

= (+$397.55 +$0.00 -$266.95); or

Total Net Profit (If stock assigned at $42.00 at Oct2015 expiration): +$214.60

= (+$397.55 +$84.00 -$266.95)

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

= +$130.60/$8,666.95

Annualized Return (If option exercised early): +55.0%

= (+$130.60/$8,666.95)*(365/10 days); OR

2. Absolute Return (If stock assigned at $42.00 at Oct2015 expiration): +2.5%

= +$214.60/$8,666.95

Annualized Return (If stock assigned): +31.2%

= (+$214.60/$8,666.95)*(365/29 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 $42.00 strike price at assignment, with 2.0% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $41.25 ($43.29 -$2.04) provides a nice 3.8% downside protection. 


2. JPMorgan Chase Co. (JPM)

A $.44 quarterly dividend goes ex-dividend on October 2nd.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.30 [$2.23 option premium - ($60.93 stock price - $60.00 strike price)] remaining in the short call options decay substantially below the $.44 dividend amount by October 1st (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: +2.0% absolute return (equivalent to +51.4% annualized return for the next 14 days) if the stock is assigned early (day prior to Oct 2nd ex-div date); OR

If Dividend Capture:  +2.7% absolute return (equivalent to +33.9% annualized return over the next 29 days) if the stock is assigned at Oct2015 expiration on October 16th.

09/18/2015 Bought 200 JPM shares @ $60.93
09/18/2015 Sold 2 JPM Oct2015 $60.00 Call options @ $2.23
10/02/2015 Upcoming ex-dividend of $.44 per share

Two possible overall performance results (including commissions) for this JPMorgan Chase Co. (JPM) covered calls position are as follows:
Stock Purchase Cost: $12,194.95
= ($60.93*200+$8.95 commission)

Net Profit:
(a) Options Income: +$435.55
= ($2.23*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Oct 2nd ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Oct2015 expiration): +$88.00
= ($.44 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Sept 30th): -$194.95
+($60.00-$60.93)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $60.00 at Oct2015 expiration): -$194.95
+($60.00-$60.93)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Oct 2nd ex-div date): +$240.60

= (+$435.55 +$0.00 -$194.95); or

Total Net Profit (If stock assigned at $60.00 at Oct2015 expiration): +$328.60

= (+$435.55 +$88.00 -$194.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +2.0%

= +$240.60/$12,194.95

Annualized Return (If option exercised early): +51.4%

= (+$240.60/$12,194.95)*(365/14 days); OR

2. Absolute Return (If stock assigned at $60.00 at Oct2015 expiration): +2.7%

= +$328.60/$12,194.95

Annualized Return (If stock assigned): +33.9%

= (+$328.60/$12,194.95)*(365/29 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 0.8% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $58.70 ($60.93 - $2.23) provides 3.0% of downside protection. 

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In summary, these are both relatively conservative covered calls investments that provide nice annualized ROI potential if they are exercised [either early (on day prior to ex-div date) or upon the options expiration date].