Today, a Covered Calls position was established in Lam Research Corp. (ticker symbol LRCX) with a September 21st, 2018 expiration and at the $165.00 strike price. This position has an expected upcoming quarterly ex-dividend on September 6th of $1.10 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the Sept 21st, 2018 options expiration date. Quarterly earnings were reported recently, so the next earnings report will not be until mid October. Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, a slightly in-the-money Covered Calls position was established.
As detailed below, a potential return-on-investment result is +2.85% absolute return (equivalent to +52.0% annualized
return for the next 20 days) if the stock is assigned early (business day
prior to Sept 6th ex-date); OR +3.5%
absolute return (equivalent to +35.8% annualized return over the next 36
days) if the stock is assigned on the September 21st options expiration date.
Lam Research Corp. (LRCX) -- New Covered Calls Position
Although unlikely, if the
current time value (i.e. extrinsic value) of $4.60 [$7.74 option premium -
($168.14 stock price - $165.00 strike price)] remaining in the two short Call
options decays substantially (down to about $.15 or less) by Sept 5th (the business day prior to the ex-dividend date), there is
a possibility that the Call options owner would exercise early and
therefore call the 200 Lam Research shares away to capture the dividend payment.
The transactions were:
08/17/2018 Bought 200 Lam Research Corp. shares @ $168.14
08/17/2018 Sold 2 LRCX 09/21/2018 $165.00 Call options @ $7.74
Note: a simultaneous buy/write transaction was executed.
09/06/2018 Expected upcoming quarterly ex-dividend of $1.10 per share
Two possible overall performance results (including commissions) for this Lam Research Covered Calls position are as follows:
Covered Calls Cost Basis: $32,084.95
= ($168.14 - $7.74) *200 + $4.95 commission
Net Profit Components:
(a) Options Income: +$1,546.66
= ($7.74*200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on Sept 5th, the business day prior to Sept 6th ex-div date): +$0.00;
or
(b) Dividend Income (If Lam Research shares assigned at Sept 21st, 2018 expiration): +$220.00
= ($1.10 dividend per share x 200 shares)
(c) Capital Appreciation (If LRCX assigned early on Sept 5th): -$632.95
+($165.00-$168.14)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If LRCX assigned at $165.00 strike price at options expiration): -$632.95
+($165.00-$168.14)*200 shares - $4.95 commissions
1. Total Net Profit [If option exercised on Sept 5th (business day prior to Sept 6th ex-dividend date)]: +$913.71
= (+$1,546.66 +$0.00 -$632.95); or
2. Total Net Profit (If Lam Research shares assigned at $165.00 at Sept 21, 2018 expiration): +$1,133.71
= (+$1,546.66 +$220.00 -$632.95)
1. Absolute Return [If LRCX option exercised on Sept 5th (business day prior to ex-dividend date)]: +2.85%
= +$913.71/$32,084.95
Annualized Return (If option exercised early): +52.0%
= (+$913.71/$32,084.95)*(365/20 days); or
2. Absolute Return (If Lam Research shares assigned at $165.00 at Sept 21, 2018 expiration): +3.5%
= +$1,133.71/$32,084.95
Annualized Return (If LRCX stock assigned at $92.50 at Aug 17, 2018 expiration): +35.8%
= (+$1,133.71/$32,084.95)*(365/36 days)
Either
outcome would provide an excellent return-on-investment result. These returns will be achieved as long as the stock is
above the $165.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $159.30 ($168.14 -$7.74 -$1.10)
provides 5.3% downside protection below today's purchase
price.
The Covered Calls Advisor has established a set of eleven criteria to evaluate potential Covered Calls using a dividend capture strategy. The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved. As shown in the table below, all of the eleven criteria are achieved for this Lam Research Corp. Covered Calls position.
