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 as is normally the case when there is an intervening ex-dividend date), the Covered Calls position was chosen since it has a higher return-on-investment potential for this April 17th $27.00 options contract.
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Two potential return-on-investment results are:
- +1.99% absolute return (equivalent to +80.8% annualized return for the next 9 days) if the stock is assigned early (business day prior to the April 8th ex-dividend date); OR
- +3.96% absolute return (equivalent to +76.0% annualized return over the next 19 days) if the stock is assigned on the April 17th options expiration date.
AT&T Inc. (T) -- New Covered Calls Position
03/30/2020 Bought 400 AT&T Inc. shares @ $29.79
03/30/2020 Sold 4 AT&T 4/17/2020 $27.00 Call options @ $3.33
Note: a simultaneous buy/write transaction was executed
04/08/2020 Upcoming quarterly ex-dividend of $.52 per share
Two possible overall performance results (including commissions) for this AT&T Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $10,591.63
= ($29.79 - $3.33) *400 shares + $7.63 commissions
Net Profit Components:
(a) Options Income: +$1,332.00
= ($3.33 *400 shares)
(b) Dividend Income (If option exercised early on Apr 7th, the business day prior to Apr 8th ex-div date): +$0.00; or
(b) Dividend Income (If AT&T stock assigned at Apr 17th, 2020 expiration): +$208.00
= ($.52 dividend per share x 400 shares)
(c) Capital Appreciation (If AT&T assigned early on April 7th): -$1,116.00
+($27.00 - $29.79) *400 shares; or
(c) Capital Appreciation (If shares assigned at $27.00 strike price at options expiration): -$1,116.00
+($27.00 - $29.79) * 400 shares
+($27.00 - $29.79) *400 shares; or
(c) Capital Appreciation (If shares assigned at $27.00 strike price at options expiration): -$1,116.00
+($27.00 - $29.79) * 400 shares
1. Total Net Profit [If option exercised on April 7th (business day prior to April 8th ex-dividend date)]: +$216.00
= (+$1,332.00 options income +$0.00 dividend income -$1,116.00 capital appreciation); or
2. Total Net Profit (If AT&T Inc. shares assigned at $27.00 at Apr 17th, 2020 expiration): +$424.00
= (+$1,332.00 +$208.00 -$1,116.00)
1. Absolute Return [If option exercised on Apr 7th (business day prior to ex-dividend date)]: +2.0%
= +$216.00/$10,591.63
Annualized Return (If option exercised early): +80.8%
= (+$216.00/$10,591.63)*(365/9 days); or
2. Absolute Return (If AT&T shares assigned at $27.00 at Apr 17th, 2020 options expiration): +4.0%
= +$424.00/$10,591.63
Annualized Return (If AT&T shares assigned at $27.00 at Apr 17th, 2020 expiration): +76.0%
= (+$424.00/$10,591.63)*(365/17 days)
Either outcome provides a very attractive return-on-investment result for this AT&T investment. These returns will be achieved as long as the stock is above the $27.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $25.94 ($29.79 -$3.33 -$.52) provides a substantial 12.9% downside protection below today's stock purchase price.
At least eight of the ten metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this AT&T position, all ten criteria are met in this case.
