Early Assignment of BlackRock Inc. Covered Call Position

This morning, the Covered Calls Advisor received notification from my broker (Schwab) that 3 Delta Air Lines Inc. (ticker symbol DAL) March 15th, 2019 Call options were exercised early, so the 300 shares of Delta Air Lines stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $45.00 strike price.

Today is Delta's $.35 per share quarterly ex-dividend date.  This DAL Covered Calls position was established on January 23rd, 2019 when the stock was purchased at $47.01 per share (link to blog post when Delta position established).  The price has since risen to $50.43 at yesterday's market close.  In the original blog post, the Covered Calls Advisor stated: "If the current time value (i.e. extrinsic value) of $1.18 [$3.19 Call options price - ($47.01 stock price - $45.00 strike price)] remaining in the three short Call options decays substantially (down to about $.15 or less) by the business day prior to the estimated ex-dividend date, there is a possibility that the Call options owner would exercise early and therefore call the 300 Delta shares away to capture the dividend payment. Yesterday, the remaining time value was close to $0.00, so the Call owner did exercise early.   

As detailed below, the actual return-on-investment result achieved for this Delta Air Lines position was a +2.6% absolute return (equivalent to +26.6% annualized return) for the 36 days this position was held.  The Covered Calls Advisor was satisfied to allow this outcome to happen since the annualized return-on-investment result achieved of +26.6% exceeds the +24.0% that would have occurred if the stock had instead been assigned at the March 15th options expiration date.  The cash received in the Covered Calls Advisor Portfolio will be retained until a new Covered Calls position is established, the transactions details of which will be posted on this blog the same day they occur.

BlackRock Inc. (BLK) -- New Covered Calls Position

Although unlikely, if the current time value (i.e. extrinsic value) of $8.30 [$14.20 option premium - ($415.90 stock price - $410.00 strike price)] remaining in the short call options decays substantially by March 4th (the business day prior to the ex-dividend date), there is a possibility that the Call option owner would exercise early and therefore call the 100 BlackRock shares away to capture the dividend payment.

The transactions were:
02/05/2019 Bought 100 BlackRock shares @ $415.90
02/05/2019 Sold 1 BlackRock 03/15/2019 $410.00 Call option @ $14.20
Note: a simultaneous buy/write transaction was executed and the implied volatility in the Call option was 22.4.  
03/05/2019 Upcoming quarterly ex-dividend of $3.30 per share

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 15th, 2019 options expiration) for this BlackRock Inc. Covered Call position is 60.4%, so the expected value annualized ROI of this investment (if held until expiration) is +16.2% (+26.9% * 60.4%), a satisfactory return for this in-the-money Covered Calls position.  The bullish market so far in 2019 has been accompanied, as expected, by a decline in the CBOE Volatility Index to its current level of about 15.5.  This is well below VIX's level above 20 in late December and its lowest level since early October.  This decline in volatility means lower potential return-on-investment results for us Covered Calls investors since lower volatility is accompanied by lower options income received when sold to establish our positions.     

Two possible overall performance results (including commissions) for this BlackRock Covered Call position are as follows:
Covered Calls Cost Basis: $40,174.95
= ($415.90 - $14.20) *100 shares + $4.95 commission

Net Profit Components:
(a) Options Income: +$1,419.33
= ($14.20*100 shares) - $0.67 commissions
(b) Dividend Income (If option exercised early on Mar 4th, the business day prior to Mar 5th ex-div date): +$0.00; or
(b) Dividend Income (If BLK assigned at Mar 15th, 2019 expiration): +$330.00
= ($3.30 dividend per share x 100 shares)

(c) Capital Appreciation (If BLK assigned early on Mar 4th): -$594.95
+($410.00-$415.90)*100 shares - $4.95 commissions; or
(c) Capital Appreciation (If assigned at $410.00 strike price at options expiration): -$594.95
+($410.00-$415.90)*100 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Mar 4th (business day prior to March 5th ex-dividend date)]: +$824.38

= (+$1,419.33 options income +$0.00 dividend income -$594.95 capital appreciation); or

2. Total Net Profit (If BlackRock shares assigned at $410.00 at March 15th, 2019 expiration): +$1,154.38

= (+$1,419.33 +$330.00 -$594.95)

1. Absolute Return [If option exercised on Mar 4th (business day prior to ex-dividend date)]: +2.1%

= +$824.38/$40,174.95

Annualized Return (If option exercised early): +26.7%

= (+$824.38/$40,174.95)*(365/28 days); or

2. Absolute Return (If BlackRock shares assigned at $410.00 at March 15, 2019 expiration): +2.9%

= +$1,154.38/$40,174.95

Annualized Return (If BLK shares assigned at $410.00 at Mar 15, 2019 expiration): +26.9%

= (+$1,154.38/$40,174.9)*(365/39 days)

Either outcome provides a good return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $410.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $398.40 ($415.90 -$14.20 -$3.30) provides 4.2% downside protection below today's purchase price.