Established Covered Calls Position in Wells Fargo Bank Using the Dividend Capture Strategy

Today a Covered Calls position was established in Wells Fargo Bank (ticker symbol WFC) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $28.94 and 3 May 15th, 2020 Call options were sold at $1.86 at the $27.50 strike price.

At today's purchase price, the upcoming ex-dividend of $.51 on May 7th has a 6.8% annualized dividend yield.  So, this short-term (only 16 days until options expiration) position is established to take advantage of the potential to achieve a very high annualized return-on-investment in a position that meets all ten criteria of the Covered Calls Advisor's Dividend Capture Strategy (see table at end of this post).  In addition, Wells Fargo fundamentally is historically undervalued since it now trades at a price-to-tangible-book-value ratio of about 0.8, a level only about one-half of its prior 5-year median average. 

Two potential return-on-investment results for this position are highlighted below (including the possibility of early assignment since the ex-dividend is prior to the May 15th options expiration date).  Given the Covered Calls Advisor's current Overall Market Meter outlook is Bearish, an in-the-money Covered Calls position was established. 

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

•  +1.6% absolute return (equivalent to +80.9% annualized return for the next 7 days) if the stock is assigned early (business day prior to the May 7th ex-dividend date); OR 

• +3.4% absolute return (equivalent to +78.3% annualized return over the next 16 days) if the stock is assigned on the May 15th options expiration date.

Wells Fargo Bank (WFC) -- New Covered Calls Position
The transaction was:

04/30/2020 Bought 300 Wells Fargo Bank shares @ $28.94
Note: this stock price was down 3.5% from yesterday's closing price (and the Dow was down about 300 points) early in this morning's trading when this transaction executed.
04/30/2020 Sold 3 Wells Fargo 5/15/2020 $27.50 Call options @ $1.86
Note: a simultaneous buy/write transaction was executed and the Implied Volatility of the WFC 5/15/2020 $27.50 Call options that were sold was higher at 43.2 than the current CBOE S&P 500 Volatility Index (VIX) at 34.2.
05/07/2020 Upcoming quarterly ex-dividend of $.51 per share

Two possible overall performance results (including commissions) for this Wells Fargo Covered Calls position are as follows:
Covered Calls Cost Basis: $8,126.01
= ($28.94 - $1.86) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$558.00
= ($1.86 * 300 shares)
(b) Dividend Income (If option exercised early on May 6th, the business day prior to the May 7th ex-div date): +$0.00; or
(b) Dividend Income (If Wells Fargo stock assigned at May 15th, 2020 options expiration): +$153.00
= ($.51 dividend per share x 300 shares)

(c) Capital Appreciation (If Wells Fargo Call options assigned early on May 6th): -$432.00
+($27.50 - $28.94) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $27.50 strike price at options expiration): -$432.00
+($27.50 - $28.94) * 300 shares

1. Total Net Profit [If option exercised on May 6th (business day prior to the May 7th ex-dividend date)]: +$126.00

= (+$558.00 options income +$0.00 dividend income -$432.00 capital appreciation); or

2. Total Net Profit (If Wells Fargo shares assigned at $27.50 at May 15th, 2020 expiration): +$279.00

= (+$558.00 +$153.00 -$432.00)

1. Absolute Return [If option exercised on May 6th (business day prior to ex-dividend date)]: +1.6%

= +$126.00/$8,126.01

Annualized Return (If option exercised early): +80.9%

= (+$126.00/$8,126.01)*(365/7 days); or

2. Absolute Return (If Wells Fargo shares assigned at $27.50 at May 15th, 2020 options expiration): +3.4%

= +$279.00/$8,126.01

Annualized Return (If Wells Fargo shares assigned at $27.50 at May 15th, 2020 expiration): +78.3%

= (+$279.00/$8,126.01)*(365/16 days)

Either outcome provides a very attractive return-on-investment result for this Wells Fargo Bank investment.  These returns will be achieved as long as the stock is above the $27.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $26.57 ($28.94 -$1.86 -$.51) provides a substantial 8.2% 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 Wells Fargo position, all ten criteria are met.

Roll Up of Morgan Stanley Covered Calls

The Covered Calls Advisor recently established Covered Calls in Morgan Stanley at the May 15th, 2020 $35.00 strike price.  The price of the 300 Morgan Stanley shares have increased from the purchase price of $37.23 to $40.10 with about 10 minutes remaining prior to today's market close.  The $.35 quarterly ex-dividend date is tomorrow and there was only $.06 [$5.16 Call options price - ($40.10 share price - $35.00 strike price)] of time value remaining in the May 15th $35.00 Call options.  With such a low ($.06 per share) time value remaining, it was likely that the Call options owner would choose to exercise their option so that the 300 shares of Morgan Stanley stock owned in the Covered Calls Advisor Portfolio would be assigned (i.e. sold) at the $35.00 strike price to the owner of the Calls.

The Covered Calls Advisor decided to roll up this Covered Calls position from the $35.00 strike to the $37.50 strike at the same May 15th, 2020 options expiration date.  At today's market close, the price of MS stock was $40.13 and the $37.50 Calls have $.41 of time value remaining, so it is very unlikely that the owner of these $37.50 Calls will exercise their option today (and immediately forgo $.41 in order to capture the $.35 ex-dividend tomorrow).  If so, the Covered Calls Advisor will capture the $.35 dividend plus potentially the $.41 per share time value now remaining in the May 15th $37.50 Calls.  This will occur if the Morgan Stanley stock price remains above $37.50 at the May 15th expiration.

A potential return-on-investment result for this Morgan Stanley Covered Calls since its inception on April 16th, 2020  is +6.8% absolute return in 30 days (equivalent to a +83.3% annualized return-on-investment).  By rolling up the original Covered Calls, this result would exceed the 5.5% absolute return (+67.2% annualized) that was the maximum potential of the original Covered Calls position at the $35.00 strike price.

The detailed transactions and a potential result are provided below.   

Morgan Stanley (MS) -- Continuation of Covered Calls Position
The transactions to-date are:
04/16/2020 Bought 300 Morgan Stanley shares @ $37.23
Note: this stock price was down 3.0% from yesterday's closing price (and the Dow was down about 200 points) this morning when this transaction executed.
04/16/2020 Sold 3 Morgan Stanley 5/15/2020 $35.00 Call options @ $3.73
Note: a simultaneous buy/write transaction was executed and the Implied Volatility of the MS 5/15/2020 $35.00 Call options that were sold was substantially higher at 58.9 than the current CBOE S&P 500 Volatility Index (VIX) at 41.7 (which continues to also be very high relative to its historic average around 16).
04/28/2020 Bought-to-Close 3 MS 5/15/2020 $35.00 Call options @ $5.16 per share
04/28/2020  Sold-to-Open 3 MS 5/15/2020 $37.50 Call options @ $3.09 per share
Note: this was a simultaneous roll up transaction
04/29/2020 Upcoming quarterly ex-dividend of $.35 per share


A possible overall performance result (including commissions) for this Morgan Stanley Covered Calls position is as follows:
Covered Calls Cost Basis: $10,052.01
= ($37.23 - $3.73) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$502.02
= ($3.73 - $5.16 + $3.09) * 300 shares + $4.02 commissions
(b) Dividend Income: +$105.00
= ($.35 dividend per share x 300 shares)

(c) Capital Appreciation (If Morgan Stanley shares assigned at $37.50 strike price at options expiration): +$81.00
+($37.50 - $37.23) * 300 shares

Total Net Profit (If Morgan Stanley shares assigned at $37.50 at May 15th, 2020 expiration): +$688.02

= (+$502.02 +$105.00 +$81.00)

Absolute Return (If Morgan Stanley shares assigned at $37.50 at May 15th, 2020 options expiration): +6.8%

= +$688.02/$10,052.01

Annualized Return (If Morgan Stanley shares assigned at $37.50 at May 15th, 2020 expiration): +83.3%

= (+$688.02/$10,052.01)*(365/30 days)

Established Covered Calls in Intel Corporation

Today, a Covered Calls position was established in Intel Corporation (ticker symbol INTC) with a May 15th, 2020 expiration and at the $55.00 strike price.  This position has an upcoming quarterly ex-dividend on May 6th of $.33 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 May 15th options expiration date.  Quarterly earnings were just reported last week, so the next earnings report will not be until late July.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Bearish, a moderately in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +1.1% absolute return (equivalent to +46.0% annualized return for the next 9 days) if the stock is assigned early (business day prior to May 6th ex-dividend date); OR +1.7% absolute return (equivalent to +33.6% annualized return over the next 19 days) if the stock is assigned on the May 15th options expiration date.


Intel Corporation (INTC) -- New Covered Calls Position

An ex-dividend occurs on May 6th of $.33 per share.  Although unlikely, if the current time value (i.e. extrinsic value) of $.62 [$4.17 option premium - ($58.55 stock price - $55.00 strike price)] remaining in the short call options decays substantially (down to about $.10 or less) by May 5th (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 Intel shares away to capture the dividend payment.

The transactions were:
04/27/2020 Bought 300 Intel shares @ $58.55
04/27/2020 Sold 3 Intel 05/15/2020 $55.00 Call options @ $4.17
Note: a simultaneous buy/write transaction was executed.
05/06/2020 Upcoming quarterly ex-dividend of $.33 per share

Two possible overall performance results (including commissions) for this Intel Covered Calls position are as follows:
Covered Calls Cost Basis: $16,316.01
= ($58.55 - $4.17) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,251.00
= ($4.17 * 300 shares)
(b) Dividend Income (If option exercised early on May 5th, the business day prior to May 6th ex-div date): +$0.00; or
(b) Dividend Income (If INTC assigned at May 15th, 2020 expiration): +$99.00
= +($.33 dividend per share x 300 shares)

(c) Capital Appreciation (If INTC assigned early on May 5th): -$1,065.00
= +($55.00 - $58.55) * 300 shares; or
(c) Capital Appreciation (If INTC assigned at $55.00 strike price at options expiration): -$1,065.00
= +($55.00 - $58.55) * 300 shares

1. Total Net Profit [If option exercised on May 5th (business day prior to May 6th ex-dividend date)]: +$186.00

= (+$1,251.00 +$0.00 -$1,065.00); or

2. Total Net Profit (If Intel assigned at $55.00 at May 15, 2020 expiration): +$285.00

= (+$1,251.00 +$99.00 -$1,065.00)

1. Absolute Return [If option exercised on May 5th (business day prior to ex-dividend date)]: +1.1%

= +$185.00/$16,316.01

Annualized Return (If option exercised early): +46.0%

= (+$185.00/$16,316.01)*(365/9 days); or

2. Absolute Return (If Intel assigned at $55.00 at May 15th, 2020 expiration): +1.7%

= +$285.00/$16,316.01

Annualized Return (If Intel assigned at $55.00 at May 15, 2020 expiration): +33.6%

= (+$285.00/$16,316.01)*(365/19 days)

Either outcome provides a good return-on-investment result for this investment.  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 $54.05 ($58.55 -$4.17 -$.33) provides 7.7% downside protection below today's stock purchase price.

Established Covered Calls Position in Constellation Brands Inc.

Today a Covered Calls position was established in Constellation Brands Inc. (ticker symbol STZ) with a May 15th, 2020 expiration and at the $140.00 strike price.  This position has an upcoming quarterly ex-dividend on May 4th of $.75 per share, so two potential returns-on-investment for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the May 15th options expiration date.  Constellation Brands reported their 4th quarter earnings about three weeks ago, so there is no earnings report prior to the May 15th options expiration date.  Given the Covered Calls Advisor's current Overall Market Meter outlook of Bearish, a moderately in-the-money (8.8% downside protection to the strike price) Covered Calls position was established. 


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

•  +2.1% absolute return (equivalent to +70.2% annualized return for the next 11 days) if the stock is assigned early (business day prior to the May 4th ex-dividend date); OR 

• +2.7% absolute return (equivalent to +42.2% annualized return over the next 23 days) if the stock is assigned on the May 15th options expiration date.

Constellation Brands Inc. (STZ) -- New Covered Calls Position
The simultaneous buy/write transaction was:
04/23/2020 Bought 200 Constellation Brands shares @ $153.48
04/23/2020 Sold 2 Constellation Brands 5/15/2020 $140.00 Call options @ $16.38
Note: the Implied Volatility of these Calls was very high at 52.6 when this transaction was executed.
5/04/2020 Upcoming quarterly ex-dividend of $.75 per share

Two possible overall performance results (including commissions) for this Constellation Brands Covered Calls position are as follows:
Covered Calls Cost Basis: $27,421.34
= ($153.48 - $16.38) *200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$3,276.00
= ($16.38 * 200 shares)
(b) Dividend Income (If option exercised early on May 1st, the last business day prior to the May 4th ex-div date): +$0.00; or
(b) Dividend Income (If Constellation Brands stock assigned at May 15th, 2020 expiration): +$150.00
= ($.75 dividend per share x 200 shares)

(c) Capital Appreciation (If Constellation Brands assigned early on May 1st): -$2,696.00
+($140.00 - $153.48) *200 shares; or
(c) Capital Appreciation (If shares assigned at $140.00 strike price at options expiration): -$2,696.00
+($140.00 - $153.48) * 200 shares

1. Total Net Profit [If option exercised on May 1st (business day prior to May 4th ex-dividend date)]: +$580.00

= (+$3,276.00 options income +$0.00 dividend income -$2,696.00 capital appreciation); or

2. Total Net Profit (If Constellation Brands shares assigned at $140.00 at May 15th, 2020 expiration): +$730.00

= (+$3,276.00 +$150.00 dividend income -$2,696.00)

1. Absolute Return [If option exercised on May 1st (business day prior to ex-dividend date)]: +2.1%

= +$580.00/$27,421.34

Annualized Return (If option exercised early): +70.2%

= (+$580.00/$27,421.34)*(365/11 days); or

2. Absolute Return (If STZ shares assigned at $140.00 at May 15th, 2020 options expiration): +2.7%

= +$730.00/$27,421.34

Annualized Return (If STZ shares assigned at $140.00 at May 15th, 2020 expiration): +42.2%

= (+$730.00/$27,421.34)*(365/23 days)

Either outcome provides a very attractive return-on-investment result for this Constellation Brands investment.  These returns will be achieved as long as the stock is above the $140.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $136.35 ($153.48 -$16.38 -$.75) provides a substantial 11.2% 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 position, nine of ten criteria are met in this case.

Four New Positions Established

Four new positions were established in the Covered Calls Portfolio in Alphabet Inc. (GOOGL), Baidu Inc. (BIDU), iShares Emerging Markets ETF (EEM), and New Oriental Education and Technology Group Inc. (EDU).   All four positions were at the May monthly options expiration date of May 15th, 2020.  Given the Overall Market Meter outlook of Bearish, conservative in-the-money strike prices were selected for each position.    

Since the market has declined significantly the past two days, the VIX has increased from 38.2 at market close last Friday to 47 today.  So, the options premiums now available from selling options (either Covered Calls or 100% Cash-Secured Puts) is very attractive and provide nice potential return-on-investment results, even at moderately in-the-money strike prices.

I continue to track U.S. daily new cases of Covid-19.  The chart below shows that a plateau has been reached and daily new cases are beginning to show signs of declining:

In terms of the Covid-19 spread, the U.S. is several weeks behind East Asia (China, South Korea, etc.).  These countries are gradually now getting back to business in a substantial way, so the positions taken today in BIDU, EEM, and EDU reflect the Covered Calls Advisor's somewhat greater comfort level with these positions at this particular time.  These countries also remain undervalued by most fundamental valuation metrics relative to the U.S., so their stock markets are likely to outperform the U.S. equities markets over the next year.  In addition, as explained in a previous post, U.S. companies have just recently begun their 1st quarter earnings reports, so the Covered Calls Advisor will continue to monitor these reports daily.  Currently, the Covered Calls Advisor Portfolio is more than 50% in cash (money market accounts), so in the days and weeks ahead, as greater clarity on sector, industry, and individual company trends become more apparent, additional positions will be established and will be posted on this blog site whenever they occur.  

As detailed below, the potential return-on-investment results for these four positions are: 

• Alphabet Inc. : +2.3% absolute return in 25 days (equivalent to a +33.0% annualized return-on-investment);
• Baidu Inc. : +2.8% absolute return in 25 days (equivalent to a +41.4% annualized return-on-investment); 
• iShares MSCI Emerging Markets ETF : +1.7% absolute return in 25 days (equivalent to a +25.5% annualized return-on-investment); and
• New Oriental Education and Technology Group Inc. : +3.7% absolute return in 26 days (equivalent to a +51.9% annualized return-on-investment)

1.  Alphabet Inc. (GOOGL) -- New 100% Cash-Secured Put Position

The transaction was as follows:
04/21/2020 Sold 1 GOOGL May 15th, 2020 $1,120.00 100% Cash-Secured Put option @ $25.30 per share 
Note: The Put was sold when the stock was trading at $1,213.85 per share.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $112,000.67
= $1,120.00 per share * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$2,530.00
= ($25.30 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alphabet stock is above $1,120.00 strike price at May 15th expiration): +$0.00
= ($1,120.00 -$1,120.00) * 100 shares

Potential Total Net Profit (If Alphabet stock price is above $1,120.00 strike price at May 15th options expiration): +$2,530.00
= (+$2,530.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.3%
= +$2,530.00/$112,000.67
Equivalent Annualized Return: +33.0%
= (+$2,530.00/$112,000.67)*(365/25 days)



2. Baidu Inc. (BIDU) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
04/21/2020 Sold 3 BIDU May 15th, 2020 $90.00 100% Cash-Secured Put options @ $2.55 per share 
Note: The Puts were sold when the stock was trading at $99.47 per share.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $27,002.01
= $90.00 per share * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$765.00
= ($2.55 * 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Baidu stock is above $90.00 strike price at May 15th expiration): +$0.00
= ($90.00 -$90.00) * 300 shares

Potential Total Net Profit (If BIDU stock price is above $90.00 strike price at May 15th options expiration): +$765.00
= (+$765.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.8%
= +$765.00/$27,002.01
Equivalent Annualized Return: +41.4%
= (+$765.00/$27,002.01)*(365/25 days)



3. iShares Emerging Markets ETF (EEM) -- New Covered Calls Position

The transactions were as follows:
04/21/2020 Bought 500 shares of iShares Emerging Markets ETF @ $34.89 per share 
04/21/2020 Sold 5 EEM May 15, 2020 $32.00 Call options @ $3.45 per share
Note: this was a simultaneous Buy/Write transaction.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $15,726.75
= ($34.89 - $3.45) * 500 shares + $6.75 commission

Net Profit Components:
(a) Options Income: +$1,725.00
= ($3.45 * 500 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If EEM is above $32.00 strike price at May 15th expiration): -$1,449.95
= ($32.00 - $34.89) * 500 shares - $4.95 commission

Total Net Profit: +$275.05
= (+$1,725.00 options income +$0.00 dividend income -$1,449.95 capital appreciation)

Absolute Return: +1.7%
= +$275.05/$15,726.75
Equivalent Annualized Return: +25.5%
= (+$275.05/$15,726.75)*(365/25 days)

The downside 'breakeven price' at expiration is at $31.44 ($34.89 - $3.45), which is 9.9% below the current market price of $34.89.



4. New Oriental Education and Technology Inc. (EDU) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
04/20/2020 Sold 2 EDU May 15th, 2020 $100.00 100% Cash-Secured Put options @ $3.70 per share 
Notes: The Puts were sold when the stock was trading at $109.46 per share. 

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,001.36
= $100.00 per share * 200 shares + $1.36 commission

Net Profit Components:
(a) Options Income: +$740.00
= ($3.70 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EDU stock is above $100.00 strike price at May 15th expiration): +$0.00
= ($100.00 -$100.00) * 200 shares

Potential Total Net Profit (If New Oriental Education stock price is above $100.00 strike price at May 15th options expiration): +$740.00
= (+$740.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +3.7%
= +$740.00/$20,001.36
Equivalent Annualized Return: +51.9%
= (+$740.00/$20,001.36)*(365/26 days)

April 17th, 2020 Options Expiration Results

The Covered Calls Advisor Portfolio had ten positions with April 17th, 2020 options expirations. Since the March 20th options expiration, the S&P 500 has risen dramatically from 2,305 to its current level of 2,875.  Consequently, all ten positions were in-the-money at expiration, the options expired, and the stocks were assigned (i.e. sold) at their respective strike prices.  The maximum potential return-on-investment results were achieved for all ten positions as follows:

• Alibaba Group Holdings (BABA) -- +4.0% absolute return (equivalent to +44.5% annualized return on investment) for the 33 days of this investment
• Alphabet Inc. (GOOGL) -- +3.5% absolute return (equivalent to +74.6% annualized) for the 17 days of this investment  
• Baidu Inc. (BIDU) -- +2.2% absolute return (equivalent to +79.1% annualized) for the 10 days of this investment
• Facebook Inc. (FB) -- +5.7% absolute return (equivalent to +62.9% annualized) for the 33 days of this investment  
• iShares MSCI Emerging Markets ETF (EEM) -- +3.6% absolute return (equivalent to +55.1% annualized) for the 24 days of this investment
• JPMorgan Chase & Co. (JPM) -- +11.4% absolute return (equivalent to +125.8% annualized) for the 33 days of this investment  
• Merck & Co. Inc. (MRK) -- +7.6% absolute return (equivalent to +64.6% annualized) for the 43 days of this investment
• Oracle Corp. (ORCL) -- +2.6% absolute return (equivalent to +52.4% annualized) for the 18 days of this investment  
• SPDR S&P 500 ETF (SPY) -- +3.4% absolute return (equivalent to +49.6% annualized) for the 25 days of this investment
• SPDR S&P 500 ETF (SPY) -- +3.8% absolute return (equivalent to +59.8% annualized) for the 23 days of this investment  

There is now only one current Covered Calls position in the Covered Calls Advisor Portfolio (Morgan Stanley) with a May 15th, 2020 monthly options expiration date.  The cash now available will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  The Covered Calls Advisor intends to invest this cash on new positions but will do so slowly.  First quarter earnings reports began this past week, largely with banks reporting.  I will research selected earnings reports carefully and the associated commentary of company management (and analysts) each day for the next several weeks.  As always during earnings reporting season like that which we have now entered, focus will be on identifying investing opportunities -- at the country, sector, industry, and company levels.   Establishing new positions will be limited primarily to companies that have reported their quarterly earnings and therefore have no intervening earnings report prior to the May 15th monthly options expiration date.  Given that we are now in recession and that 2nd quarter earnings will undoubtedly be atrocious, the most likely outcome in the near term is that stocks will decline from their current level (i.e. S&P 500 at 2,875).  This sentiment is consistent with the Covered Calls Advisor's Overall Market Meter outlook of  'Bearish' (see right sidebar).  Consequently, new Covered Calls positions will be hedged by establishing Covered Calls at moderately in-the-money strike prices (to provide substantial downside protection).       

All future transactions will continue to be posted on this site the same day they occur.  As always, please email me at the address shown in the right sidebar with any questions or comments related specifically to this blog or to Covered Calls investing in general.

Best Wishes and Godspeed,
Jeff Partlow

Established Covered Calls Position in Morgan Stanley Using the Dividend Capture Strategy

Today a Covered Calls position was established in Morgan Stanley (ticker symbol MS) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $37.23 and 3 May 15th, 2020 Call options were sold at $3.73 at the $35.00 strike price.

Morgan Stanley reported their earnings before market open this morning.  Given the current coronavirus crisis, the leading Capital Markets banks like Morgan Stanley and Goldman Sachs are less risky investments than traditional branch banking companies during upcoming months yet at current prices they are well below their tangible book values.  This morning, Morgan Stanley also declared an upcoming quarterly ex-dividend on April 29th of $.35 per share (a 3.8% annualized dividend yield at the current price).  Two potential return-on-investment results for this position are detailed below (including the possibility of early exercise since the ex-dividend is prior to the May 15th options expiration date).  Given the Covered Calls Advisor's current Overall Market Meter outlook is Bearish, an in-the-money Covered Calls position was established. 

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

•  +4.5% absolute return (equivalent to +125.7% annualized return for the next 13 days) if the stock is assigned early (business day prior to the April 29th ex-dividend date); OR 

• +5.5% absolute return (equivalent to +67.2% annualized return over the next 30 days) if the stock is assigned on the May 15th options expiration date.

This Morgan Stanley Covered Calls position is the first with a May 15th monthly options expiration date in the Covered Calls Advisor Portfolio.  The other ten positions are very likely to be assigned tomorrow.  Some might be rolled out to May, but most will likely be allowed to be assigned and will therefore convert to cash.  The Covered Calls Advisor intends to use most of this cash on new May positions but will do so slowly.  I will be watching earnings releases closely each day for the next several weeks and will limit establishing new positions primarily to companies that have reported their quarterly earnings and have no intervening earnings report prior to the May 15th options expiration date.   

Morgan Stanley (MS) -- New Covered Calls Position
The transaction was:
04/16/2020 Bought 300 Morgan Stanley shares @ $37.23
Note: this stock price was down 3.0% from yesterday's closing price (and the Dow was down about 200 points) this morning when this transaction executed.
04/16/2020 Sold 3 Morgan Stanley 5/15/2020 $35.00 Call options @ $3.73
Note: a simultaneous buy/write transaction was executed and the Implied Volatility of the MS 5/15/2020 $35.00 Call options that were sold was substantially higher at 58.9 than the current CBOE S&P 500 Volatility Index (VIX) at 41.7 (which continues to also be very high relative to its historic average around 16).
04/29/2020 Upcoming quarterly ex-dividend of $.35 per share

Two possible overall performance results (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $10,052.01
= ($37.23 - $3.73) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,119.00
= ($3.73 * 300 shares)
(b) Dividend Income (If option exercised early on Apr 28th, the business day prior to Apr 29th ex-div date): +$0.00; or
(b) Dividend Income (If Morgan Stanley stock assigned at May 15th, 2020 expiration): +$105.00
= ($.35 dividend per share x 300 shares)

(c) Capital Appreciation (If Morgan Stanley Call options assigned early on April 28th): -$669.00
+($35.00 - $37.23) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $35.00 strike price at options expiration): -$669.00
+($35.00 - $37.23) * 300 shares

1. Total Net Profit [If option exercised on April 28th (business day prior to April 29th ex-dividend date)]: +$450.00

= (+$1,119.00 options income +$0.00 dividend income -$669.00 capital appreciation); or

2. Total Net Profit (If Morgan Stanley shares assigned at $35.00 at May 15th, 2020 expiration): +$555.00

= (+$1,119.00 +$105.00 -$669.00)

1. Absolute Return [If option exercised on Apr 28th (business day prior to ex-dividend date)]: +4.5%

= +$450.00/$10,052.01

Annualized Return (If option exercised early): +125.7%

= (+$450.00/$10,052.01)*(365/13 days); or

2. Absolute Return (If Morgan Stanley shares assigned at $35.00 at May 15th, 2020 options expiration): +5.5%

= +$555.00/$10,052.01

Annualized Return (If Morgan Stanley shares assigned at $35.00 at May 15th, 2020 expiration): +67.2%

= (+$555.00/$10,052.01)*(365/30 days)

Either outcome provides a very attractive return-on-investment result for this Morgan Stanley investment.  These returns will be achieved as long as the stock is above the $35.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.15 ($37.23 -$3.73 -$.35) provides a substantial 11.0% 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 Morgan Stanley position, all ten criteria are met.

Overall Market Meter is Slightly Bearish

Today, the Covered Calls Advisor calculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The seven factors used are categorized as macroeconomic, momentum, value, and growth metrics as as follows:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).

The current Market Meter average of 2.43 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 1.51 to 2.50). 

So what is our current Covered Calls investing strategy?  Based on the Covered Calls Advisor's "Slightly Bearish" Overall Market Meter (see right sidebar), the corresponding strategy is to "on-average sell 2% in-the-money Covered Calls for the next options expiration month".    

As always, your comments or questions regarding this post, or anything related to Covered Calls investing, are welcomed. Please email me at partlow@cox.net.

Regards and Godspeed,
Jeff

New Position Established in Baidu Inc.

A new 100% Cash-Secured Puts position was established early in the trading session today in Baidu Inc. (BIDU). Three April 17th, 2020  $90.00 100% Cash-Secured Puts were sold at $1.95 per share when the stock price was $96.14.  Baidu was trading over 5% lower this morning on news that China’s internet regulator ordered the company to clean up improper information and halt the spread of “low-brow content” (the company said it would suspend operations of some mobile app channels).  Because of the sharp decline in the stock price this morning, the Implied Volatility of the Put options had spiked up to 70.8 when these Puts were sold. 

The Covered Calls Advisor views Baidu when below $100 as extremely undervalued.  Current fundamental valuation metrics such as price/sales ratio are at or near historic lows.  There are over 30 analysts currently covering BIDU and their average target price is about $150.  Like Alphabet in the U.S., Baidu is the dominant search engine in China with about 70% market share and about 400 million monthly active users (more than the total population of the U.S.).  Baidu Maps is also #1 in China with almost 300 million monthly active users and it is also a leader in areas with future high growth potential such as speech and facial recognition, streaming entertainment, and autonomous vehicles.            

As detailed below, the potential return-on-investment result is +2.2% absolute return in 10 days (equivalent to a +79.1% annualized return-on-investment).  This provides a very attractive return-on-investment potential given that a conservative position with a strike price 6.8% below the stock price was selected for this position.


Baidu Inc. (BIDU) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
04/08/2020 Sold 3 BIDU April 17, 2020 $90.00 100% Cash-Secured Put options @ $1.95 per share 
Note: The Open Interest in these Puts was 866 contracts

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $27,002.01
= $90.00 per share * 300 shares +$2.01 commissions

Net Profit Components:
(a) Options Income: +$585.00
= $1.95 * 300 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Baidu is above $90.00 strike price at Apr 17th expiration): +$0.00
= ($90.00 - $90.00) * 300 shares

Potential Total Net Profit (If Baidu is above $90.00 strike price at April 17th options expiration): +$585.00
= (+$585.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.2%
= +$585/$27,002.01
Equivalent Annualized Return: +79.1%
= (+$585/$27,002.01)*(365/10 days)

Early Assignment of AT&T Inc. Covered Calls

Early this morning I received email and text notifications from my broker (Schwab) that all 4 AT&T Inc. (ticker symbol T) Call options were exercised early, so the 400 shares of AT&T Inc. stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $27.00 strike price. 

Details of the transactions and the results for this AT&T position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $.54 = [$3.33 options premium - ($29.79 stock price - $27.00 strike price).  By yesterday's market close (the last business day prior to the April 8th, 2020 ex-dividend date), the time value had declined to $0.29; so, the full $.54 options income profit per share potential was achieved upon the early assignment closing of this position.  The per share price had decreased slightly from $29.79 when the position was originally established (on March 30th) to $29.56 at yesterday's market close.  The owner of the Calls exercised their option to buy the shares at the $27.00 strike price in order to capture the $.52 dividend.  As detailed below, this early assignment provided an attractive return-on-investment (roi) result for the Covered Calls Advisor Portfolio of +2.0% absolute return (equivalent to +80.8% annualized roi for the 9 days this position was held. 

The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls (or 100% Cash-Secured Puts) position is established.  As always, the transactions details will be posted on this blog site the same day that they occur.

The detailed results for this AT&T Inc. position are provided below.

AT&T Inc. (T) -- Covered Calls Position Closed

The transactions were:
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
04/07/2020 Early exercise of 4 AT&T April 17th, 2020 $27.00 Call options, so 400 AT&T shares assigned (i.e. sold) at the $27.00 strike price.

The overall performance results (including commissions) for this AT&T Inc. Covered Calls position were 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 (AT&T options exercised early on Apr 7th, the business day prior to Apr 8th ex-div date): +$0.00

(c) Capital Appreciation (AT&T assigned early on April 7th): -$1,116.00
+($27.00 - $29.79) *400 shares

Total Net Profit: +$216.00

= (+$1,332.00 options income +$0.00 dividend income -$1,116.00 capital appreciation)

Absolute Return: +2.0%

= +$216.00/$10,591.63

Annualized Return (If option exercised early): +80.8%

= (+$216.00/$10,591.63)*(365/9 days)

April 3rd, 2020 Options Expiration -- S&P 500 Covered Calls Assigned

The April 3rd, 2020 $220.00 Covered Call position in the SPDR S&P 500 ETF expired in-the-money, so the 100 shares of SPY were assigned (i.e. sold) at the $220.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +6.2% absolute return (equivalent to +102.9% annualized return-on-investment for the 22 days holding period).


SPDR S&P 500 ETF (SPY) -- Covered Call Position Closed

The transactions were as follows:
03/13/2020 Bought 100 shares of S&P 500 ETF @ $250.45 per share 
03/13/2020 Sold 1 SPDR S&P 500 ETF March 20, 2020 $235.00 Call option @ $23.93 per share
Note: this was a simultaneous Buy/Write transaction.
03/20/2020 Bought-to-Close 1 SPY 3/20/2020 $235.00 Call @ $6.84 per share
03/20/2020 Sold-to-Open 1 SPY 4/3/2020 $220.00 Call @ $26.38 per share
Note: this was a simultaneous roll-out-and-down transaction.  SPY's closing price on 3/20 was $228.80.
03/20/2020 SPY went ex-dividend at $1.0456 per share x 100 shares = $104.56 dividend income
04/03/2020 One SPY Call option expired in-the-money so 100 SPY shares sold at $220.00 strike price.
Note: the SPY share price closed in-the-money on 4/3/2020 at $247.95.


The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $22,652.70
= ($250.45 - $23.93) * 100 shares + $.70 commission

Net Profit Components:
(a) Options Income: +$4,345.64
= ($23.93 -$6.84+ $26.38) * 100 shares - $1.36 commission
(b) Dividend Income: +$104.56
= $1.0456 x 100 shares 
(c) Capital Appreciation (SPY closed above $220.00 strike price at April 3rd expiration): -$3,045.00
= ($220.00 -$250.45) * 100 shares

Total Net Profit: +$1,405.20
= (+$4,345.64 options income +$104.56 dividend income -$3,045.00 capital appreciation)

Absolute Return: +6.2%
= +$1,405.20/$22,652.70
Equivalent Annualized Return: +102.9%
= (+$1,405.20/$22,652.70)*(365/22 days)

Positions Closed in Lowes Corp. and SPDR S&P 500 ETF

Today, two short Put positions in Lowes Corp.(LOW) and SPDR S&P 500 ETF (SPY) were closed by buying-to-close these April 17th 100% cash-secured Puts. Details for each of these positions are provided below.

The Covered Calls Advisor continues to plot daily new cases of coronavirus in the United States:
 

This chart shows that new cases appeared to be stabilizing in the 20,000 daily new cases area for three days, but unfortunately the upward trend has resumed for the past two days which in combination with substantially higher weekly unemployment claims reported tomorrow morning is most likely to result in a continuation in April of the historic stock market decline just experienced in March.

After liquidating these two positions, the Covered Calls Advisor Portfolio is now only 25% invested and is 75% in cash/money markets. As shown in the right sidebar of this blog, the current investments are primarily in-the-money Covered Calls at the April 17th, 2020 monthly options expiration date.  

1.  Lowes Corp. (LOW) -- Position Closed
The transactions were as follows:
03/30/2020 Sold 3 Lowes April 17, 2020 $80.00 100% Cash-Secured Put options @ $3.40 per share 
Note: The Open Interest in these Puts was 2,547 contracts
04/01/2020 Bought-to-Close 3 Lowes April 17, 2020 $80.00 Puts @ $3.65 per share
Note: the price of Lowes stock was $83.00 when these Puts were purchased to close the position.

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $24,002.01
= $80.00 per share * 300 shares + $2.01 commissions

Net Profit Components:
(a) Options Income: -$77.01
= ($3.40 - $3.65) per share * 300 shares) - $2.01 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00

Total Net Profit: -$77.01
= (-$77.01 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: -0.3%
= -$77.01/$24,002.01
Equivalent Annualized Return: -58.6%
= (-$77.01/$24,002.01) * (365/2 days)



2.  SPDR S&P 500 ETF (SPY) -- Position Closed

The transactions were as follows:
03/26/2020 Sold 2 April 17, 2020 $235.00 100% Cash-Secured Put options @ $8.85 per share 
Note: The Open Interest in these Puts was 123,399 contracts
04/01/2020 Bought-to-Close 2 SPY April 17, 2020 $235.00 Puts @ $5.98 per share
Note: the price of the SPY ETF was $250.70 when these Puts were purchased to close the position.

The performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $47,006.29
= $235.00 per share * 200 shares +$6.29 commissions

Net Profit Components:
(a) Options Income: +$574.00
= ($8.85 - $5.98) * 200 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00

Total Net Profit: +$574.00
= (+$574.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +1.2%
= +$574.00/$47,006.29
Equivalent Annualized Return: +74.3%
= (+$574.00/$47,006.29)*(365/6 days)