As detailed below, a potential return-on-investment result is +1.1% absolute return (equivalent to +79.2% annualized return for the next 5 days) if the stock is assigned early (business day prior to February 20th ex-date); OR +1.6% absolute return (equivalent to +20.5% annualized return over the next 29 days) if the stock is assigned on the March 15th options expiration date.
Applied Materials Inc. -- Covered Calls Position Established
Although unlikely, if the
current time value (i.e. extrinsic value) of $.42 [$2.54 options premium -
($39.12 stock price - $37.00 strike price)] remaining in the short call
options decays substantially by February 19th (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 300 Applied Materials shares away to capture the dividend payment. The transactions were:
02/15/2019 Bought 300 AMAT shares @ $39.12
02/15/2019 Sold 3 AMAT March 15, 2019 $37.00 Call options @ $2.54 per share
Note: a simultaneous buy/write transaction was executed.
02/20/2019 Upcoming quarterly ex-dividend of $.20 per share
Two possible overall performance results (including commissions) for this Applied Materials Covered Calls position are as follows:
Covered Calls Cost Basis: $10,978.95
= ($39.12 - $2.54) *300 shares + $4.95 commission
Net Profit Components:
(a) Options Income: +$759.99
= ($2.54*300 shares) - $2.01 commissions
(b) Dividend Income (If option exercised early on Feb 19th, the business day prior to Feb 20th ex-div date): +$0.00; or
(b) Dividend Income (If AMAT assigned at Mar 15th, 2019 expiration): +$60.00
= ($.20 dividend per share x 300 shares)
(c) Capital Appreciation (If AMAT assigned early on Feb 19th): -$640.95
+($37.00-$39.12)*300 shares - $4.95 commissions; or
(c) Capital Appreciation (If shares assigned at $57.50 strike price at options expiration): -$640.95
+($37.00-$39.12)*300 shares - $4.95 commissions
+($37.00-$39.12)*300 shares - $4.95 commissions; or
(c) Capital Appreciation (If shares assigned at $57.50 strike price at options expiration): -$640.95
+($37.00-$39.12)*300 shares - $4.95 commissions
1. Total Net Profit [If option exercised on Feb 19th (business day prior to Feb 20th ex-dividend date)]: +$119.04
= (+$759.99 options income +$0.00 dividend income -$640.95 capital appreciation); or
2. Total Net Profit (If Applied Materials shares assigned at $37.00 at March 15th, 2019 expiration): +$179.04
= (+$759.99 +$60.00 -$640.95)
1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.1%
= +$119.04/$10,978.95
Annualized Return (If option exercised early): +79.2%
= (+$119.04/$10,978.95)*(365/5 days); or
2. Absolute Return (If Applied Materials shares assigned at $37.00 at March 15, 2019 expiration): +1.6%
= +$179.04/$10,978.95
Annualized Return (If AMAT shares assigned at $37.00 at Mar 15, 2019 expiration): +20.5%
= (+$179.04/$10,978.95)*(365/29 days)
Either outcome provides a good return-on-investment result for this Applied Materials Inc. investment. These returns will be achieved as long as the stock is above the $37.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $36.38 ($39.12 stock purchase price -$2.54 options income -$.20 dividend income) provides a nice 7.0% downside breakeven protection below today's purchase price.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 15th, 2019 options expiration) for this Applied Materials Covered Calls position is 74.6%, so the expected value annualized ROI of this investment (if held until expiration) is +15.3% (+20.5% * 74.6%), a satisfactory return for this in-the-money Covered Calls position.
As shown in the table below for the Covered Calls Advisor's Dividend Capture Strategy spreadsheet, all eleven criteria are achieved for this AMAT Covered Calls position.
