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.