There is an upcoming ex-dividend of $.35 on July 30th which is included in the analysis below. This investment is very similar to the Goldman Sachs investment in the Covered Calls Advisor Portfolio last month using a dividend capture strategy. Selling in-the-money or near-the-money monthly Covered Calls using this dividend capture strategy for the six biggest U.S. money center banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo) each month (JPMorgan for Jan, Apr, July, and Oct options expirations; Citigroup, Morgan Stanley, and/or Wells Fargo for Feb, May, Aug, and Nov expirations; and Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec expirations) should result in approximately a +6.0% higher annualized return than would be achieved with Covered Calls in these same stocks during non-ex-dividend months.
As detailed below, two potential outcomes for this investment are: (1) +1.1% absolute return-on-investment for the next 13 days (equivalent to +32.0% on an annualized return basis) if Morgan Stanley stock is assigned on July 29th (the day prior to the July 30th ex-dividend date); OR
(2) +2.0% absolute return-on-investment for the next 31 days (equivalent to +23.3% on an annualized return basis) if Morgan Stanley stock closes above the $42.00 strike price on the August 16th options expiration date.
The transactions were:
07/17/2019 Bought 300 shares of Morgan Stanley stock @ $43.83 per share
07/17/2019 Sold 3 MS August 16th, 2019 $42.00 Call options @ $2.32 per share
07/30/2019 Upcoming ex-dividend of $.35 per share
Note: The Open Interest in these Calls was 447 contracts and the Implied Volatility was 27.6
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $12,459.96
= ($43.83 - $2.32)* 300 shares + $6.96 commission
Net Profit Components:
(a) Options Income: +$696.00
= ($2.32* 300 shares)
(b) Dividend Income (If Morgan Stanley stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): +$0.00; OR
(b) Dividend Income (If Morgan Stanley stock closes above the $42.00 strike price on the August 16th options expiration date): +$105.00
= $.35 per share * 300 shares
(c) Capital Appreciation (If Morgan Stanley stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): -$553.95
= ($42.00 -$43.83)* 300 shares - $4.95 commission; OR
(c) Capital Appreciation (If Morgan Stanley stock is above $42.00 strike price at August 16th expiration): -$553.95
= ($42.00 -$43.83)* 300 shares - $4.95 commission
1. Potential Total Net Profit (If MS stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): +$142.05
= (+$696.00 options income +$0.00 dividend income -$553.95 capital appreciation)
2. Potential Total Net Profit (If MS stock assigned at August 16th expiration): +$247.05
= (+$696.00 options income +$105.00 dividend income -$553.95 capital appreciation)
1. Absolute Return (If MS stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): +1.1%
= +$142.05/$12,459.96
Equivalent Annualized Return: +32.0%
= (+$142.05/$12,459.96)*(365/13 days); OR
2. Absolute Return (If MS stock assigned at $42.00 strike price at options expiration): +2.0%
= +$247.05/$12,459.96
Equivalent Annualized Return: +23.3%
= (+$247.05/$12,459.96)*(365/31 days)
The downside 'breakeven price' at expiration is at $41.16 ($43.83 - $2.32 - $.35), which is 6.1% below the current market price of $43.83. This is good downside protection for this Morgan Stanley Covered Calls position given the potential +23.3% annualized ROI for this investment.
