Established Covered Calls Position in Marathon Petroleum Corp.

Today, a Covered Calls position was established in Marathon Petroleum Corp. (ticker symbol MPC) with a December 20th, 2019 expiration and at the $62.50 strike price.  This position has an upcoming quarterly ex-dividend on November 19th of $.53 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the Dec 20th options expiration date.  3rd Quarter, 2019 earnings were reported two weeks ago, so the next earnings report won't be for 2 1/2 more months, well after the December 20th expiration date. Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, an in-the-money Covered Calls position was established. 

Just prior to establishing this Covered Calls position, a comparison was made to see whether a Covered Calls or a 100% Cash-Secured Puts position would result in a higher annualized return-on-investment result.  As shown in the table below (and is normally the case when there is an intervening ex-dividend date), the Covered Calls position was chosen since it has a slightly higher return-on-investment potential.

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According to Reuters Research, MPC is very highly rated since sixteen of seventeen analysts covering Marathon Petroleum Corp. rate it as either a Buy or Outperform, one rates it as a Hold, and none rate it as Underperform or Sell.


Two potential return-on-investment results are: 

•  +2.0% absolute return (equivalent to +148.2% annualized return for the next 5 days) if the stock is assigned early (business day prior to November 19th ex-date); OR 

• +2.9% absolute return (equivalent to +28.6% annualized return over the next 37 days) if the stock is assigned on the December 20th options expiration date.

Marathon Petroleum Corp. (MPC) -- New Covered Calls Position

Although very unlikely, if the current time value (i.e. extrinsic value) of $1.25 [$3.40 options premium - ($64.65 stock price - $62.50 strike price)] remaining in the short call options decays substantially by November 18th (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 200 Marathon Petroleum shares away to capture the dividend payment.

The transactions were:
11/14/2019 Bought 200 Marathon Petroleum shares @ $64.65
11/14/2019 Sold 2 MPC 12/20/2019 $62.50 Call options @ $3.40
Note: a simultaneous buy/write transaction was executed and the implied volatility in the option was 31.3.  
11/19/2019 Upcoming quarterly ex-dividend of $.53 per share


Two possible overall performance results (including commissions) for this Marathon Petroleum Covered Calls position are as follows:
Covered Calls Cost Basis: $12,250.00
= ($64.65 - $3.40) *200 shares

Net Profit Components:
(a) Options Income: +$678.66
= ($3.40 *200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on Nov 18th, the business day prior to Nov 19th ex-div date): +$0.00; or
(b) Dividend Income (If MPC assigned at Dec 20th, 2019 expiration): +$106.00
= ($.53 dividend per share x 200 shares)

(c) Capital Appreciation (If MPC assigned early on Nov 18th): -$430.00
+($62.50 -$64.65)*200 shares; or
(c) Capital Appreciation (If shares assigned at $62.50 strike price at options expiration): -$430.00
+($62.50-$64.65)*200 shares

1. Total Net Profit [If option exercised on Nov 18th (business day prior to Nov 19th ex-dividend date)]: +$248.66

= (+$678.66 options income +$0.00 dividend income -$430.00 capital appreciation); or

2. Total Net Profit (If Marathon Petroleum shares assigned at $62.50 at Dec 20th, 2019 expiration): +$354.66

= (+$678.66 +$106.00 -$430.00)

1. Absolute Return [If option exercised on Nov 18th (business day prior to ex-dividend date)]: +2.0%

= +$248.66/$12,250.00

Annualized Return (If option exercised early): +148.2%

= (+$248.66/$12,250.00)*(365/5 days); or

2. Absolute Return (If Marathon Petroleum shares assigned at $62.50 at Dec 20th, 2019 options expiration): +2.9%

= +$354.66/$12,250.00

Annualized Return (If MPC shares assigned at $62.50 at Dec 20th, 2019 expiration): +28.6%

= (+$354.66/$12,250.00)*(365/37 days)

Either outcome provides an attractive return-on-investment result for this Marathon Petroleum investment.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $60.72 ($64.65 -$3.40 -$.53) provides a substantial 6.1% downside protection below today's stock purchase price.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Dec 20th, 2019 options expiration) for this Marathon Petroleum Covered Calls position is 64.8%, so the expected value annualized ROI of this investment (if held until expiration) is +18.5% (+28.6% * 64.8%), 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 MPC Covered Calls position.