Established Covered Calls Position in Devon Energy Corp.

Today, a covered calls positions was established in Devon Energy Corp (ticker symbol DVN) at the $42.50 strike price and with a Dec2015 expiration.  Devon was purchased at $45.325 and the Call options were sold for $4.05. This investment is a strategic one that explicitly considers the upcoming quarterly dividend with an ex-dividend date on December 11th (prior to the Dec 18th options expiration date).  Details of this position is provided below.

1. Devon Energy Corp. (DVN)

A $.24 quarterly dividend goes ex-dividend on December 11th.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.225 [$4.05 option premium - ($45.325 stock price - $42.50 strike price)] remaining in the short call options decay below the $.24 dividend amount by December 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: +2.5% absolute return (equivalent to +41.2% annualized return for the next 22 days) if the stock is assigned early (day prior to Dec 11th ex-div date); OR

If Dividend Capture:  +3.0% absolute return (equivalent to +36.7% annualized return over the next 30 days) if the stock is assigned at Dec2015 expiration on December 18th.

11/19/2015 Bought 200 DVN shares @ $45.325
11/19/2015 Sold 2 DVN Dec2015 $42.50 Call options @ $4.05
12/11/2015 Upcoming ex-dividend of $.24 per share

Two possible overall performance results (including commissions) for this Devon covered calls position are as follows:
Stock Purchase Cost: $9,073.95
= ($45.325*200+$8.95 commission)

Net Profit:
(a) Options Income: +$799.55
= ($4.05*200 shares) - $10.45 commissions
(b) Dividend Income (If option exercised early on day prior to Dec 11th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Dec2015 expiration): +$48.00
= ($.24 dividend per share x 200 shares); or

(c) Capital Appreciation (If stock assigned early on Dec 10th): -$573.95
+($42.50-$45.325)*200 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $42.50 at Dec2015 expiration): -$573.95
+($42.50-$45.325)*200 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Dec 11th ex-div date): +$225.60

= (+$799.55 +$0.00 -$573.95); or

Total Net Profit (If stock assigned at $42.50 at Dec2015 expiration): +$273.60

= (+$799.55 +$48.00 -$573.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +2.5%

= +$225.60/$9,073.95

Annualized Return (If option exercised early): +41.2%

= (+$225.60/$9,073.95)*(365/22 days); OR

2. Absolute Return (If stock assigned at $42.50 at Dec2015 expiration): +3.0%

= +$273.60/$9,073.95

Annualized Return (If stock assigned): +36.7%

= (+$273.60/$9,073.95)*(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 attractive return-on-investment.  These returns will be achieved as long as the stock is above the $42.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $41.275 ($45.325 -$4.05) provides a substantial 8.9% downside protection from today's purchase price.