Covered Calls Established in Occidental Petroleum Corp. Using Dividend Capture Strategy

Today, a Covered Calls position was established in Occidental Petroleum Corp. (ticker symbol OXY) with a September 20, 2019 expiration and at the $40.00 strike price.  This position has an expected upcoming quarterly ex-dividend on September 9th of $.79 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 20th, 2019 options expiration date.  At the $40.00 strike price, the annual dividend yield is a very high 7.9%.  Quarterly earnings were reported recently, so the next earnings report will not be until November.  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 +1.4% absolute return (equivalent to +33.1% annualized return for the next 15 days) if the stock is assigned early (business day prior to September 9th ex-date); OR +3.4% absolute return (equivalent to +47.2% annualized return over the next 26 days) if the stock is assigned on the September 20th options expiration date.


Occidental Petroleum Corp. (OXY) -- New Covered Calls Position
Although unlikely, if the current time value (i.e. extrinsic value) of $.55 [$2.56 options premium -($42.01 stock price - $40.00 strike price) remaining in the four short Call options decays substantially (down to about $.15 or less) by Sept 6th (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 400 Occidental Petroleum shares away to capture the dividend payment.

The transactions were:
08/26/2019 Bought 400 Occidental Petroleum shares @ $42.01
08/26/2019 Sold 4 OXY 09/20/2019 $40.00 Call options @ $2.56
Note: A simultaneous buy/write transaction was executed.   The Open Interest in these Calls was 174 contracts and the Implied Volatility was very attractive at 40.3 considering the large size and relative predictability of Oxy's business.
09/09/2018 Upcoming quarterly ex-dividend of $.79 per share

Two possible overall performance results (including commissions) for this Occidental Petroleum Covered Calls position are as follows:
Covered Calls Cost Basis: $15,787.63
= ($42.01 - $2.56) *400 shares + $7.63 commissions

Net Profit Components:
(a) Options Income: +$1,024.00
= ($2.56 *400 shares)
(b) Dividend Income (If option exercised early on Sept 6th, the business day prior to Sept 9th ex-div date): +$0.00; or
(b) Dividend Income (If Occidental Petroleum shares assigned at Sept 20th, 2019 expiration): +$316.00
= ($.79 dividend per share x 400 shares)

(c) Capital Appreciation (If OXY assigned early on Sept 6th): -$808.95
+($40.00 -$42.01) *400 shares - $4.95 commissions; or
(c) Capital Appreciation (If OXY assigned at $40.00 strike price at options expiration): -$808.95
+($40.00 -$42.01) *400 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Sept 6th (business day prior to Sept 9th ex-dividend date)]: +$215.05

= (+$1,024.00 +$0.00 -$808.95); or

2. Total Net Profit (If Occidental Petroleum shares assigned at $40.00 at Sept 20th, 2019 expiration): +$531.05

= (+$1,024.00 +$316.00 -$808.95)

1. Absolute Return [If OXY option exercised on Sept 6th (business day prior to ex-dividend date)]: +1.4%

= +$215.05/$15,787.63

Annualized Return (If option exercised early): +33.1%

= (+$273.71/$13,224.95)*(365/15 days); or

2. Absolute Return (If Occidental Petroleum shares assigned at $40.00 at Sept 20, 2019 expiration): +3.4%

= +$531.05/$15,787.63

Annualized Return (If OXY stock assigned at $67.50 at Dec 21, 2018 expiration): +47.2%

= (+$531.05/$15,787.63)*(365/26 days)

Either outcome would provide an excellent return-on-investment result.  These returns will be achieved as long as the stock is above the $40.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $38.66 ($42.01 -$2.56 -$.79) provides 8.0% 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, ten of the eleven criteria are achieved for this Occidental Petroleum Corp. Covered Calls position.

Establish Covered Calls Position in Alibaba Group Holding Ltd.

A new monthly Covered Calls position was established in Alibaba Group Holding Ltd. with a September 20th, 2019 options expiration date and at the $160.00 strike price when Alibaba was priced at $164.67. 

The Covered Calls Advisor considers Alibaba to be a core portfolio holding, so the current intention is to continue the pattern of prior months by establishing ongoing monthly Covered Calls positions in Alibaba.  For this fundamental/value investor, Alibaba continues to be a very attractive investment opportunity.  The past 5-year compound annual growth rate has been +46.0% for revenue, +28.4% for net income, and +38.6% for free cash flow.  For such an ongoing high growth rate, the current fiscal year estimated P/E Ratio of 26 is at a very attractive, value-oriented level. 

Incredibly, analysts are universally bullish on Alibaba.  According to Reuters, all forty-seven analysts rating Alibaba stock have it as either a 'Buy' or 'Outperform'.  None rate it as 'Neutral', 'Underperform', or 'Sell'.  Their average price target is $215 (30.6% above the current price).     

As shown below, the potential return-on-investment result is +3.0% absolute return in 29 days (equivalent to a +37.4% annualized return-on-investment).


Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position

The transactions were as follows:
08/23/2019 Bought 400 shares of Alibaba stock @ $164.67 per share 
08/23/2019 Sold 4 Alibaba September 20th, 2019 $160.00 Call options @ $9.30 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 36.0 when this transaction was executed, well above the 3-month Historic Volatility of 31.3.  As detailed below, this high Implied Volatility provides for an immediate generous income credit of $3,720 from selling these 2.9% in-the-money Call options.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $62,155.63
= ($164.67 - $9.30) * 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$3,720.00
= ($9.30 * 400 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $160.00 strike price at September 20th expiration): -$1,872.95
= ($160.00 -$164.67) * 400 shares - $4.95 commission

Total Net Profit: +$1,847.05
= (+$3,720.00 options income +$0.00 dividend income -$1,872.95 capital appreciation)

Absolute Return: +3.0%
= +$1,847.05/$62,155.63
Equivalent Annualized Return: +37.4%
= (+$1,847.05/$62,155.63)*(365/29 days)

The downside 'breakeven price' at expiration is at $155.37 ($164.67 - $9.30), which is 5.6% below the current market price of $164.67.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the September 20, 2019 options expiration) for this Alibaba Covered Calls position is 63.8%, so the expected value annualized ROI of this investment (if held until expiration) is +23.9% (+37.4% * 63.8%), a very good result for this moderately in-the-money Covered Calls position, especially given that there is no earnings report prior to the options expiration date.

The 'crossover price' at expiration is $169.30 = $164.67 + [$9.30 - ($164.67 - $160.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the September 20th, 2019 options expiration date rather than establishing this Covered Calls position.

Position Closed in Lowe's Companies Inc.

This morning, the Covered Calls Advisor decided to close the existing Lowe's Companies Inc. (ticker symbol LOW) Covered Calls position. This Lowe's holding was an August 16th, 2019 Covered Calls position that was not assigned at options expiration last Friday.  This morning, Lowe's stock recovered a portion of its recent declines in sympathy with the earnings beat reported this morning by Home Depot.  Lowe's reports their earnings tomorrow morning and the since I usually prefer not to hold stocks through earnings reports given the related volatility, the decision to close out the position was made.  The large cash position currently held in the Covered Calls Advisor Portfolio is invested in a Schwab money market fund yielding 2.0% and will remain there until new position(s) are established.  This current positioning is indicative of this Advisor's cautious outlook for the stock market for upcoming weeks.  As always, any new positions will be shared on this blog on the same day the transactions occur.       

As detailed below, the result was a -2.0% absolute return-on-investment (equivalent to -22.2% on an annualized basis) for the 33 days this position was held.


Lowe's Companies Inc. (LOW) -- Covered Calls Position Closed

The transactions were:
07/18/2019 Bought 200 Lowe's Companies Inc. shares @ $103.49
07/18/2019 Sold 2 Lowe's 8/16/2019 $100.00 Call options @ $4.31
Note: the Implied Volatility was 21.9 when this transaction was executed.
07/23/2019 Ex-dividend of $.55 per share
08/16/2019 Lowe's shares closed at $93.92 which was below the $100.00 strike price, so Call options expired and 200 shares of Lowe's stock were retained in the Covered Calls Advisor Portfolio
08/20/2019 Sold 200 shares of Lowe's stock at $96.66 to close out this position.

The overall performance results (including commissions) for this Lowe's Companies Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $19,842.29
= ($103.49 - $4.31) * 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$862.00
= ($4.31 *200 shares)

(b) Dividend Income: +$110.00
= ($.55 dividend per share x 200 shares)

(c) Capital Appreciation: -$1,370.95
+($96.66 -$103.49)* 200 shares - $4.95 commissions

Total Net Profit: -$398.95

= (+$862.00 options income +$110.00 dividend income -$1,370.95 capital appreciation)

Absolute Return: -2.0%

= -$398.95/$19,842.29

Annualized Return: -22.2%

= (-$398.95/$19,842.29)*(365/33 days)

Positions Closed in Valero Energy and Wells Fargo

This morning, the Covered Calls Advisor decided to close the existing positions in Valero Energy Group (ticker symbol VLO) and Wells Fargo Bank (ticker symbol WFC).  Both holdings were out-of-the-money Covered Calls that expired last Friday.     

As detailed below, the results were:

•  Valero Energy Corp. -- A +1.5% absolute return-on-investment (equivalent to +32.4% on an annualized basis) for the 17 days this position was held.
• Wells Fargo Bank N.A. -- A +0.3% absolute return-on-investment (equivalent to +5.6% on an annualized basis) for the 17 days this position was held.

1. Valero Energy Corp. (VLO) -- Covered Calls Position Closed
The transactions were:
8/02/2019 Bought 200 shares of Valero @ $81.49 per share 
8/02/2019 Sold 2 Valero August 16th, 2019 $80.00 Call options @ $2.36 per share
Note: This was a simultaneous buy/write transaction.
08/05/2019 Ex-dividend of $.90 per share
08/16/2019 Valero shares closed at $78.12 which was below the $80.00 strike price, so Call options expired and 200 shares of VLO stock were retained in the Covered Calls Advisor Portfolio
08/19/2019 Sold 200 shares VLO stock at $79.45 to close out position

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $15,832.29
= ($81.49 - $2.36)* 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$472.00
= ($2.36 * 200 shares)
(b) Dividend Income: +$180.00
= $.90 x 200 shares
(c) Capital Appreciation: -$412.95
= ($79.45 -$81.49) * 200 shares - $4.95 commission

Total Net Profit: +$239.05
= (+$472.00 options income +$180.00 dividend income -$412.95 capital appreciation)

Absolute Return: +1.5%
= +$239.05/$15,832.29
Equivalent Annualized Return: +32.4%
= (+$239.05/$15,832.29)*(365/17 days)


2. Wells Fargo Bank N.A. (WFC) -- Covered Calls Position Closed

The transactions were as follows:
08/02/2019 Bought 500 shares of Wells Fargo stock @ $46.72 per share 
08/02/2019 Sold 5 Wells Fargo Aug 16th, 2019 $46.00 Call options @ $1.09 per share
Note: this was a simultaneous Buy/Write transaction
08/08/2019 Ex-dividend of $.51 per share
08/16/2019 Wells Fargo shares closed at $44.39 which was below the $46.00 strike price, so Call options expired and 500 shares of WFC stock were retained in the Covered Calls Advisor Portfolio
08/19/2019 Sold 500 shares WFC stock at $45.25 to close out position

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $22,823.30
= ($46.72 - $1.09) * 500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$545.00
= ($1.09 * 500 shares)
(b) Dividend Income: +$255.00
= $.51 x 500 shares
(c) Capital Appreciation: -$739.95
= ($45.25 -$46.72) * 500 shares - $4.95 commission

Total Net Profit: +$60.05
= (+$545.00 options income +$255.00 dividend income -$739.95 capital appreciation)

Absolute Return: +0.3%
= +$60.05/$22,823.30
Equivalent Annualized Return: +5.6%
= (+$60.05/$22,823.30)*(365/17 days)

August 16th, 2019 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had seven positions since the July 19th, 2019 monthly options expiration date.  All three positions that have been closed out were profitable:

• One Covered Calls position in Bristol-Myers Squibb Co. was closed out early on July 22nd to avoid the uncertainty associated with the earnings report that was released later that week.  A  small profit was achieved in this position -- see link. 

• One Covered Calls position in Morgan Stanley was assigned early (on the day prior to the July 30th ex-dividend date) and was closed out at a profit prior to this month's August 16th options expiration date.  The detailed result for this position was detailed on this blog on the same day it was closed out -- see link.

• One Covered Calls position (Alibaba Group Holdings Ltd.) closed in-the-money on the August 16th options expiration date yesterday, so these 300 shares were assigned (sold) at the $165.00 strike price.  The details of this closed position are provided below.

Four positions (CommScope Holdings, Lowes Companies Inc., Valero Energy Corp., and Wells Fargo Bank N.A.) closed out-of-the-money (stock price below the strike price) at the August 16th, 2019 options expiration.  Therefore, their options expired and the shares owned remain in the Covered Calls Advisor Portfolio (as shown in the right sidebar).  A decision will be made soon to either sell the shares or to continue with Covered Calls positions by selling Call options against the shares currently held.  As always, the transactions and return-on-investment results for these four positions will be posted on this blog site on the same day the transactions occur.

The Covered Calls Advisor's objective is to outperform the S&P 500 benchmark and to make profitable trades on at least two-thirds of positions established.  So far in calendar year 2019, all 39 positions that have been closed out have achieved a profit.  The weighted average annualized return on investment for these completed positions is +41.9%.  The four remaining open positions will be included in this 2019 results tracking when these ongoing positions are closed.


Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed

The transactions were as follows:
07/30/2019 Bought 300 shares of Alibaba stock @ $173.34 per share 
07/30/2019 Sold 3 Alibaba August 16th, 2019 $165.00 Call options @ $10.20 per share
Note: this was a simultaneous Buy/Write transaction
08/16/2019 3 Call options expired in-the-money so 300 Alibaba shares sold at $165.00 strike price.
Note: the share price closed at $174.60

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $48,948.96
= ($173.34 - $10.20) * 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$3,060.00
= ($10.20* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (BABA stock was above $165.00 strike price at August 16th expiration): -$2,506.95
= ($165.00 -$173.34) * 300 shares - $4.95 commission

Total Net Profit: +$553.05
= (+$3,060.00 options income +$0.00 dividend income -$2,506.95 capital appreciation)

Absolute Return: +1.1%
= +$553.05/$48,948.96
Equivalent Annualized Return: +22.9%
= (+$553.05/$48,948.96)*(365/18 days)

Established Covered Calls in Valero Energy Corp. and Wells Fargo Bank N.A.

Two new Covered Calls positions have been established in Valero Energy Corp.(ticker VLO) and Wells Fargo Bank N.A.(WFC) with August 16th, 2019 options expiration dates. Two Valero Call options were sold at $2.36 for the $80.00 strike price when the stock price was $81.49 and 500 shares of Wells Fargo were purchased at $46.72 while five Calls were sold at $1.09 at the $46.00 strike price.  Both positions have upcoming ex-dividends prior to the Aug 16th options expiration which is included in the potential results shown below.  If should also be noted that neither company has an earnings report prior to the expiration date.

As detailed below, the potential return-on-investment results are: 

• Valero Energy Corp.: +2.2% absolute return in 15 days (equivalent to a +53.6% annualized return-on-investment); and

• Wells Fargo Bank N.A.: +1.8% absolute return in 15 days (equivalent to a +43.2% annualized return-on-investment) 

1. Valero Energy Corp. (VLO) -- New Covered Calls Position
The transactions were:
8/02/2019 Bought 200 shares of Valero @ $81.49 per share 
8/02/2019 Sold 2 Valero August 16th, 2019 $80.00 Call options @ $2.36 per share
Note: This was a simultaneous buy/write transaction.
08/05/2019 Upcoming ex-dividend of $.90 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $15,832.29
= ($81.49 - $2.36)* 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$472.00
= ($2.36 * 200 shares)
(b) Dividend Income: +$180.00
= $.90 x 200 shares
(c) Capital Appreciation (If Valero shares are above $80.00 strike price at Aug 16th expiration): -$302.95
= ($80.00 -$81.49) * 200 shares - $4.95 commission

Potential Total Net Profit (If VLO stock assigned at expiration): +$349.05
= (+$472.00 options income +$180.00 dividend income -$302.95 capital appreciation)

Absolute Return: +2.2%
= +$349.05/$15,832.29
Equivalent Annualized Return: +53.6%
= (+$349.05/$15,832.29)*(365/15 days)


2. Wells Fargo Bank N.A. (WFC) -- New Covered Calls Position

Here is a recent interesting article that makes a good case for investing in large banks in general and Wells Fargo in particular: link

The transactions were as follows:
08/02/2019 Bought 500 shares of Wells Fargo stock @ $46.72 per share 
08/02/2019 Sold 5 Wells Fargo Aug 16th, 2019 $46.00 Call options @ $1.09 per share
Note: this was a simultaneous Buy/Write transaction
08/08/2019 Upcoming ex-dividend of $.51 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $22,823.33
= ($46.72 - $1.09) * 500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$545.00
= ($1.09 * 500 shares)
(b) Dividend Income: +$255.00
= $.51 x 500 shares
(c) Capital Appreciation (If Wells Fargo stock is above $46.00 strike price at Aug 16th expiration): -$364.95
= ($46.00 -$46.72) * 500 shares - $4.95 commission

Total Net Profit: +$405.05
= (+$545.00 options income +$225.00 dividend income -$364.95 capital appreciation)

Absolute Return: +1.8%
= +$405.05/$22,823.33
Equivalent Annualized Return: +43.2%
= (+$405.05/$22,823.33)*(365/15 days)

The downside 'breakeven price' at expiration is at $45.12 ($46.72 - $1.09 - $.51), which is 1.9% below the current market price of $46.72.