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.