This position continues the implementation of the Covered Calls Advisor's dividend capture strategy of monthly Covered Calls on money center bank stocks. Using good timing, as dictated using this advisor's Dividend Capture Strategy worksheet, selling in-the-money monthly Covered Calls using this dividend capture strategy for one of the four biggest U.S. money center banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) each month;
(JPMorgan for Jan, Apr, July, and Oct options expirations;
Citigroup and/or Wells Fargo for Feb, May, Aug, and Nov expirations; and
Bank of America for Mar, Jun, Sep, and Dec expirations).
The goal of these monthly Covered Calls in the money center banks is to both capture the quarterly dividend payment and for the stock prices to remain above the strike price at options expiration, therefore achieving the maximum possible return-on-investment result for the position. So far, this approach has provided higher annualized return results than would be achieved with either: (1) Covered Calls in these same stocks during their non-ex-dividend months; or (2) A simple buy-and-hold stock purchase of these bank stocks. Hopefully, the outperformance results achieved to-date using this strategy will continue with this November 15th Citigroup Covered Calls position.
A potential return-on-investment result is +0.3% absolute return (equivalent to +57.5% annualized return for the next 2 days) if the stock is assigned early [prior to close of business tomorrow (Thursday) which is the last business day prior to Friday's ex-dividend date]; OR +1.0% absolute return (equivalent to +22.5% annualized return over the next 17 days) if the stock is assigned on the November 15th options expiration date.
These potential return-on-investment results for this position is detailed below and includes the possibility of early exercise by an owner of these Call options. Fortunately, Citigroup reported their quarterly earnings two weeks ago, so the next earnings report is not until mid-January of 2020, well after the options expiration date for this position.
Citigroup Inc. (C) -- New Covered Calls Position
It is unlikely, but if the current time value (i.e. extrinsic value) of $.22 [$2.76 Call options price - ($72.54 stock price - $70.00 strike price)] remaining in the three short Call options decays substantially (down to about $.10 or less) by close of business tomorrow (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 Citigroup shares away to capture the dividend payment.
The transactions were:
10/30/2019 Bought 300 Citigroup shares @ $72.54
10/30/2019 Sold 3 Citigroup 11/15/2019 $70.00 Call options @ $2.76
Note: A simultaneous buy/write transaction was executed. The Open Interest in these Calls was very large at 10,098 contracts (so there is a nice, tight bid/ask spread) and given that their is no intervening quarterly earnings prior to the Nov. 15th options expiration, the Implied Volatility was also at an attractive level (25.3) for Citigroup when this position was established.
11/01/2019 Upcoming quarterly ex-dividend of $.51 per share
Two possible overall performance results (including commissions) for this
Citigroup Covered Calls position are as follows:
Covered Calls Cost Basis: $20,936.01
= ($72.54 - $2.76) *300 + $2.01 commission
Net Profit Components:
(a) Options Income: +$828.00
= ($2.76*300 shares)
(b) Dividend Income (If option exercised early on October 31st, the business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If Citi shares assigned at Nov 15th, 2019 expiration): +$153.00
= ($.51 dividend per share x 300 shares)
(c) Capital Appreciation (If Citigroup shares assigned early on October 31st): -$762.00
+($70.00-$72.54)*300 shares; or
(c) Capital Appreciation (If Citi assigned at $70.00 strike price at options expiration): -$762.00
+($70.00-$72.54)*300 shares
+($70.00-$72.54)*300 shares; or
(c) Capital Appreciation (If Citi assigned at $70.00 strike price at options expiration): -$762.00
+($70.00-$72.54)*300 shares
1. Total Net Profit [If option exercised on Oct 31st (business day prior to Nov 1st ex-dividend date)]: +$66.00
= (+$828.00 +$0.00 -$762.00); or
2. Total Net Profit (If Citi shares assigned at $70.00 at Nov 15th, 2019 expiration): +$219.00
= (+$828.00 +$153.00 -$762.00)
1. Absolute Return [If Citigroup options exercised on Jan 31st (business day prior to ex-dividend date)]: +0.3%
= +$66.00/$20,936.01
Annualized Return (If option exercised early): +57.5%
= (+$66.00/$20,936.01)*(365/2 days); or
2. Absolute Return (If Citigroup shares assigned at $70.00 at Nov 15, 2019 expiration): +1.0%
= +$219.00/$20,936.01
Annualized Return (If Citi stock assigned at $70.00 at Nov 15th expiration): +22.5%
= (+$219.00/$20,936.01)*(365/17 days)
Either outcome would provide a good return-on-investment result. These returns will be achieved as long as the stock is above the $70.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $69.27 ($72.54 -$2.76 -$.51) provides 4.5% 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 Citigroup Inc. Covered Calls position.
