Covered Calls Established in ConocoPhillips Using Dividend Capture Strategy

Today, a Covered Calls position was established in ConocoPhillips (ticker symbol COP) with a October 25, 2019 expiration and at the $55.00 strike price.  Although the next ex-dividend date and amount has not yet been declared, based on its historic trend, a quarterly ex-dividend of $.305 per share is expected on October 18th, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the October 25th, 2019 options expiration date.  At the $55.00 strike price, the annual dividend yield is 2.1%.  The next quarterly earnings report will be on October 29th which is just after the options expiration date. 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 +1.5% absolute return (equivalent to +30.5% annualized return for the next 18 days) if the stock is assigned early (business day prior to the expected October 18th ex-date); OR +2.1% absolute return (equivalent to +29.0% annualized return over the next 26 days) if the stock is assigned on the October 25th options expiration date.


ConocoPhillips (COP) -- New Covered Calls Position

If the current time value (i.e. extrinsic value) of $.84 [$2.91 options premium - ($57.07 stock price - $55.00 strike price) remaining in the two short Call options decays substantially (down to about $.15 or less) by October 17th (the last 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 ConocoPhillips shares away to capture the dividend payment.

The transactions were:
09/30/2019 Bought 200 ConocoPhillips shares @ $57.07
09/30/2019 Sold 2 COP 10/25/2019 $55.00 Call options @ $2.91
Note: A simultaneous buy/write transaction was executed.   The Implied Volatility was attractive at 31.2.
10/18/2019 Expected upcoming quarterly ex-dividend of $.305 per share

Two possible overall performance results (including commissions) for this ConocoPhillips Covered Calls position are as follows:
Covered Calls Cost Basis: $10,838.29
= ($57.07 - $2.91) *200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$582.00
= ($2.91 * 200 shares)
(b) Dividend Income (If option exercised early on the business day prior to Oct 18th ex-div date): +$0.00; or
(b) Dividend Income (If ConocoPhillips shares assigned at Oct 25th, 2019 expiration): +$61.00
= ($.305 dividend per share x 200 shares)

(c) Capital Appreciation (If COP assigned early on Oct 17th): -$418.95
+($55.00 -$57.07) * 200 shares - $4.95 commissions; or
(c) Capital Appreciation (If COP assigned at $55.00 strike price at options expiration): -$418.95
+($55.00 -$57.07) * 200 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Oct 17th (business day prior to Oct 18th ex-dividend date)]: +$163.05

= (+$582.00 +$0.00 -$418.95); or

2. Total Net Profit (If ConocoPhillips shares assigned at $55.00 at Oct 25th, 2019 expiration): +$224.05

= (+$582.00 +$61.00 -$418.95)

1. Absolute Return [If COP options exercised on business day prior to ex-dividend date]: +1.5%

= +$163.05/$10,838.29

Annualized Return (If option exercised early): +30.5%

= (+$163.05/$10,838.29)*(365/18 days); or

2. Absolute Return (If ConocoPhillips shares assigned at $55.00 at Oct 25, 2019 expiration): +2.1%

= +$224.05/$10,838.29

Annualized Return (If COP stock assigned at $55.00 at Oct 25, 2019 expiration): +29.0%

= (+$224.05/$10,838.29)*(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 $55.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $53.855 ($57.07 -$2.91 -$.305) provides 5.6% 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 ConocoPhillips Covered Calls position.