Covered Calls Established in BB&T Corporation and Enterprise Product Partners LP -- Both Use the Dividend Capture Strategy

Today, two new covered calls position were established in BB&T Corporation (ticker symbol BBT) and Enterprise Product Partners LP (ticker EPD) with Feb2016 expirations.  Two hundred shares of BB&T stock were purchased at $31.375 and two Feb2016 Call options were simultaneously (i.e. a single buy-write transaction) sold at the $30.00 strike price for $2.09 each.  Three hundred EPD shares were purchased at $21.85 and three Feb2016 Call options were sold at the $21.00 strike price for $1.75 each.

Both of these covered calls investments are strategic ones that explicitly consider the upcoming quarterly dividends with ex-dividend dates prior to the February 19th options expiration date.  A $.27 ex-dividend is expected on Feb 10th for BB&T and $.39 on Jan 27th for EPD.  Some details for each of these positions are provided below.

1. BB&T Corporation (BBT) -- New Covered Calls Position
Regarding the dividend capture strategy: If the current time value (i.e. extrinsic value) of $.355 [$2.09 option premium - ($31.735 stock price - $30.00 strike price)] remaining in the short call options decay substantially by February 9th (the day prior to the ex-dividend date), then there is a possibility that the call option owner will exercise his/her option and will call the stock away to capture the dividend.  

As shown below, either early assignment or assignment at the Feb2016 options expiration date will provide very good return-on-investment results.

These two potential return-on-investment results are:

If Early Assignment: +0.9% absolute return (equivalent to +17.3% annualized return for the next 18 days) if the stock is assigned early (the business day prior to the Feb 10th ex-div date); OR

If Dividend Capture:  +1.7% absolute return (equivalent to +21.6% annualized return over the next 29 days) if the stock is assigned at Feb2016 expiration on February 19th.

01/22/2016 Bought 200 BBT shares @ $31.735
01/22/2016 Sold 2 BBT Feb2016 $30.00 Call options @ $2.09
02/10/2016 Upcoming ex-dividend of $.27

Two possible overall performance results (including commissions) for this BB&T Corp. (BBT) covered calls position are as follows:
Stock Purchase Cost: $6,282.95
= ($31.735*200 +$7.95 commission)

Net Profit:
(a) Options Income: +$408.55
= ($2.09*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 10th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Feb2016 expiration): +$54.00
= ($.27 dividend per share x 200 shares)

(c) Capital Appreciation [If stock assigned early on Feb 9th (business day prior to February 10th ex-div date)]: -$354.95
+($30.00-$31.735)*200 - $7.95 commissions; or
(c) Capital Appreciation (If stock assigned at $30.00 at Feb2016 expiration): -$354.95
+($30.00-$31.726)*200 - $7.95 commissions

Total Net Profit (If option exercised on business day prior to ex-div date): +$53.60

= (+$408.55 +$0.00 -$354.95); or

Total Net Profit (If stock assigned at $30.00 at Feb2016 expiration): +$107.60

= (+$408.55 +$54.00 -$354.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +0.9%

= +$53.60/$6,282.95

Annualized Return (If option exercised early): +17.3%

= (+$53.60/$6,282.95)*(365/18 days); OR

2. Absolute Return (If stock assigned at $30.00 at Feb2016 expiration): +1.7%

= +$107.60/$6,282.95

Annualized Return (If stock assigned): +21.6%

= (+$107.60/$6,282.95)*(365/29 days)

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


2. Enterprise Product Partners LP (EPD) -- New Covered Calls Position

A $.39 quarterly dividend goes ex-dividend on January 27th (i.e. 5 calendar days from today).  If the current time value (i.e. extrinsic value) of $.90 [$1.75 option premium - ($21.85 stock price - $21.00 strike price)] remaining in the short call options decay substantially by Jan 26th (the day prior to the ex-dividend date), then there is a possibility (albeit a very low probability) that the call option owner will exercise his/her option and will call the stock away to capture the dividend.  

As shown below, either early assignment or assignment at the Feb2016 options expiration date will provide very good return-on-investment results.

These two potential return-on-investment results are:

If Early Assignment: +3.8% absolute return (equivalent to +280.1% annualized return for the next 5 days) if the stock is assigned early (the business day prior to the Jan 27th ex-div date); OR

If Dividend Capture:  +5.6% absolute return (equivalent to +70.7% annualized return over the next 29 days) if the stock is assigned at Feb2016 expiration on February 19th.

01/22/2016 Bought 300 EPD shares @ $21.85
01/22/2016 Sold 3 EPD Feb2016 $21.00 Call options @ $1.75
The implied volatility of these Call options was 46 when they were sold.
01/27/2016 Upcoming ex-dividend of $.39 per share

Two possible overall performance results (including commissions) for this Enterprise Products Partners covered calls position are as follows:
Stock Purchase Cost: $6,562.95
= ($21.85*300+$7.95 commission)

Net Profit:
(a) Options Income: +$514.80
= ($1.75*300 shares) - $10.20 commissions
(b) Dividend Income (If option exercised early on business day prior to Jan 27th ex-div date): +$0.00; or
(b) Dividend Income (If stock assigned at Feb2016 expiration): +$117.00
= ($.39 dividend per share x 300 shares)

(c) Capital Appreciation [If stock assigned early on Jan 26th (business day prior to January 27th ex-div date)]: -$262.95
+($21.00-$21.85)*300 - $7.95 commissions; or
(c) Capital Appreciation (If stock assigned at $21.00 at Feb2016 expiration): -$262.95
+($21.00-$21.85)*300 - $7.95 commissions

Total Net Profit (If option exercised on business day prior to ex-div date): +$251.85

= (+$514.80 +$0.00 -$262.95); or

Total Net Profit (If stock assigned at $21.00 at Feb2016 expiration): +$368.85

= (+$514.80 +$117.00 -$262.95)

1. Absolute Return (If option exercised on day prior to ex-div date): +3.8%

= +$251.85/$6,562.95

Annualized Return (If option exercised early): +280.1%

= (+$251.85/$6,562.95)*(365/5 days); OR

2. Absolute Return (If stock assigned at $21.00 at Feb2016 expiration): +5.6%

= +$368.85/$6,562.95

Annualized Return (If stock assigned): +70.7%

= (+$368.85/$6,562.95)*(365/29 days)

Either outcome would provide an outstanding return.  These returns will be achieved as long as the stock is above the $21.00 strike price.