CVS has an upcoming quarterly ex-dividend on January 24th of $.50 per share, so the potential returns for these positions detailed below includes the possibility of early exercise since the ex-dividend is prior to the Feb 15th options expiration date. The next quarterly earnings report will be on February 20th which, fortuitously, is after the options expiration date.
1. CVS Health Corp. (CVS) -- New Covered Calls -- Position #1
A potential return-on-investment result is +1.1% absolute return (equivalent to +44.3% annualized return for the next 9 days) if the stock is assigned early (business day prior to January 24th ex-date); OR +1.9% absolute return (equivalent to +22.1% annualized return over the next 32 days) if the stock is assigned on the February 15th options expiration date.
This position is at the Feb 15th $60.00 strike price. If the current time value (i.e. extrinsic value) of $.68 [$3.88 Call options price - ($63.20 stock price - $60.00 strike price)] remaining in the two short Call options decays substantially (down to about $.10 or less) by January 23rd (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 CVS shares away to capture the dividend payment.
The transactions were:
01/15/2019 Bought 200 CVS shares @ $63.20
01/15/2019 Sold 2 CVS 02/15/2019 $60.00 Call options @ $3.88
Note: A simultaneous buy/write transaction was executed. The Open Interest in these Calls was 316 contracts and the Implied Volatility was attractive at 30.3 considering the large size and relatively good predictability of CVS's business.
01/24/2019 Upcoming quarterly ex-dividend of $.50 per share
Two possible overall performance results (including commissions) for this
CVS Covered Calls position are as follows:
Covered Calls Cost Basis: $11,868.95
= ($63.20 - $3.88) *200 + $4.95 commission
Net Profit Components:
(a) Options Income: +$774.66
= ($3.88*200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on Jan 23rd, the business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If CVS shares assigned at Feb 15th, 2019 expiration): +$100.00
= ($.50 dividend per share x 200 shares)
(c) Capital Appreciation (If CVS assigned early on Jan 23rd): -$644.95
+($60.00-$63.20)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If CVS assigned at $60.00 strike price at options expiration): -$644.95
+($60.00-$63.20)*200 shares - $4.95 commissions
+($60.00-$63.20)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If CVS assigned at $60.00 strike price at options expiration): -$644.95
+($60.00-$63.20)*200 shares - $4.95 commissions
1. Total Net Profit [If option exercised on Jan 23rd (business day prior to Jan 24th ex-dividend date)]: +$129.71
= (+$774.66 +$0.00 -$644.95); or
2. Total Net Profit (If CVS shares assigned at $60.00 at Feb 15th, 2019 expiration): +$229.71
= (+$774.66 +$100.00 -$644.95)
1. Absolute Return [If CVS option exercised on Jan 23rd (business day prior to ex-dividend date)]: +1.1%
= +$129.71/$11,868.95
Annualized Return (If option exercised early): +44.3%
= (+$129.71/$11,868.95)*(365/9 days); or
2. Absolute Return (If Occidental Petroleum shares assigned at $60.00 at Feb 15, 2019 expiration): +1.9%
= +$229.71/$11,868.95
Annualized Return (If OXY stock assigned at $67.50 at Dec 21, 2018 expiration): +22.1%
= (+$229.71/$11,868.95)*(365/32 days)
Either outcome would provide a good return-on-investment result. These returns will be achieved as long as the stock is above the $60.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $58.82 ($63.20 -$3.88 -$.50) provides 6.9% 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 eleven criteria are achieved for this CVS Health Corp. Covered Calls position.
2. CVS Health Corp. (CVS) -- New Covered Calls -- Position #2
A potential return-on-investment result is +1.8% absolute return (equivalent to +71.9% annualized return for the next 9 days) in the unlikely case that the stock is assigned early (business day prior to January 24th ex-date); OR +2.6% absolute return (equivalent to +29.5% annualized return over the next 32 days) if the stock is assigned on the February 15th options expiration date.
This position is at the Feb 15th $62.50 strike price. It is very unlikely, but if the current time value (i.e. extrinsic value) of $1.12 [$3.01 Call options price - ($64.39 stock price - $62.50 strike price)] remaining in the two short Call options decays substantially (down to about $.10 or less) by January 23rd (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 CVS shares away to capture the dividend payment.
The transactions were:
01/15/2019 Bought 200 CVS shares @ $64.39
01/15/2019 Sold 2 CVS 02/15/2019 $62.50 Call options @ $3.01
Note: A simultaneous buy/write transaction was executed. The Open Interest in these Calls was 1,020 contracts and the Implied Volatility was 29.7.
01/24/2019 Upcoming quarterly ex-dividend of $.50 per share
Two possible overall performance results (including commissions) for this
CVS Covered Calls position are as follows:
Covered Calls Cost Basis: $12,280.95
= ($64.39 - $3.01) *200 + $4.95 commission
Net Profit Components:
(a) Options Income: +$600.66
= ($3.01*200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on Jan 23rd, the business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If CVS shares assigned at Feb 15th, 2019 expiration): +$100.00
= ($.50 dividend per share x 200 shares)
(c) Capital Appreciation (If CVS assigned early on Jan 23rd): -$373.05
+($62.50-$64.39)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If CVS assigned at $62.50 strike price at options expiration): -$373.05
+($62.50-$64.39)*200 shares - $4.95 commissions
+($62.50-$64.39)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If CVS assigned at $62.50 strike price at options expiration): -$373.05
+($62.50-$64.39)*200 shares - $4.95 commissions
1. Total Net Profit [If option exercised on Jan 23rd (business day prior to Jan 24th ex-dividend date)]: +$217.71
= (+$600.66 +$0.00 -$382.95); or
2. Total Net Profit (If CVS shares assigned at $62.50 at Feb 15th, 2019 expiration): +$317.71
= (+$600.66 +$100.00 -$382.95)
1. Absolute Return [If CVS option exercised on Jan 23rd (business day prior to ex-dividend date)]: +1.8%
= +$217.71/$12,280.95
Annualized Return (If option exercised early): +71.9%
= (+$217.71/$12,280.95)*(365/9 days); or
2. Absolute Return (If CVS shares assigned at $62.50 at Feb 15, 2019 expiration): +2.6%
= +$317.71/$12,280.95
Annualized Return (If CVS stock assigned at $62.50 at Feb 15, 2019 expiration): +29.5%
= (+$317.71/$12,280.95)*(365/32 days)
Either outcome would provide a very good return-on-investment result. These returns will be achieved as long as the stock is above the $62.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $60.88 ($64.39 -$3.01 -$.50) provides 5.5% downside protection below today's purchase price.
As shown in the table below for the Covered Calls Advisor's Dividend Capture Strategy spreadsheet, all eleven criteria are achieved for this CVS Health Corp. Covered Calls position.
