Covered Calls Position Established in Discover Financial Services

A new Covered Calls position was established in Discover Financial Services (ticker DFS) with a June 19th, 2020 options expiration date.  As with the Applied Materials position established earlier this morning, Discover goes ex-dividend tomorrow so capturing this dividend is included in the potential return-on-investment results detailed below.  The Covered Calls Advisor gives a shout out to a subscriber (Thank You Harry), who emailed and suggested considering an in-the-money Covered Calls position in Discover.  

Three hundred shares of Discover were purchased at $40.70 and 3 June 19th, 2020 $35.00 strike price Call options were sold at $6.52, so a time value of $.82 [$6.52 - ($40.70 - $35.00)] per share.  The Implied Volatility of these Call options was at a surprisingly high level (approximately 60) given that there is no earnings report prior to the June 19th options expiration date; so selling these options provided an attractive options premium income. Given the Covered Calls Advisor's Bearish overall market outlook, a  conservative in-the-money Covered Calls position was established with a Delta (which provides a good approximation of the probability of assignment at expiration) of 79.5%.    

A potential return-on-investment result if this position closes in-the-money at the June 19th options expiration date is +3.7% absolute return in 32 days (equivalent to a +42.0% annualized return-on-investment).   


Discover Financial Services (DFS) -- New Covered Calls Position

The transactions were as follows:
05/19/2020 Bought 300 shares of Discover Financial Services @ $40.70 per share 
05/19/2020 Sold 3 Discover June 19th, 2020 $35.00 Call options @ $6.52 per share
05/20/2020 Ex-dividend date at $.44 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $10,256.01
= ($40.70 - $6.52) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,956.00
= ($6.52 * 300 shares)
(b) Dividend Income: +$132.00
= $.44 per share x 300 shares 
(c) Capital Appreciation (If Discover stock is above $35.00 strike price at the June 19th options expiration): -$1,710.00
= ($35.00 -$40.70) * 300 shares

Total Net Profit: +$378.00
= (+$1,956.00 options income +$132.00 dividend income -$1,710.00 capital appreciation)

Absolute Return: +3.7%
= +$378.00/$10,256.01
Equivalent Annualized Return: +42.0%
= (+$378.00/$10,256.01)*(365/32 days)

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 $33.74 ($40.70 -$6.52 -$.44) provides 17.1% downside breakeven protection below today's purchase price.