As was the case with the roll up this morning of the Goldman Sachs position, the Covered Calls Advisor decided to roll up from the $35.00 strike to the $42.50 strike at the same June 19th, 2020 options expiration date. A vertical debit spread transaction was executed at a net debit of $6.77 ($14.62 - $7.85) per share. There was only $.40 time value remaining in the $35.00 Calls for the next 24 days and trading up to the $42.50 call added $.73 to the remaining time value while also increasing the potential capital appreciation if DFS closes above $42.50 at expiration by $7.50 per share ($42.50 new strike price - $35.00 original strike price).
A potential return-on-investment result for this Discover Financial Covered Calls position is +5.8% absolute return in 32 days (equivalent to a +65.9% annualized return-on-investment) if the stock price closes above the $42.50 strike price on the June 19th options expiration date.
By rolling up the original Covered Calls, this result would exceed the +3.7% absolute return (+42.0% annualized) that was the maximum potential of the original Covered Calls position at the $35.00 strike price. In Covered Calls investing parlance, this is sometimes referred to as "hitting a double" (instead of the usual "single"), since the roll up enables us to sell Calls twice against the original stock purchase with both being at the same options expiration date.
The detailed transactions and a potential result are provided below.
Discover Financial Services (DFS) -- Continuation of Covered Calls Position
05/19/2020 Bought 300 shares of Discover Financial shares @ $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 at $.44 per share
05/27/2020 Roll up transaction executed:
Bought-to-Close 3 DFS 6/19/2020 $35.00 Call options @ $14.62 per share and simultaneously Sold-to-Open 3 DFS 6/19/2020 $42.50 Call options @ $7.85 per share
Note: The estimated probability that the $42.50 Call options close in-the-money on the June 19th options expiration date was 75.4% when this roll up transaction was executed.
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: -$79.02
= ($6.52 - $14.62 + $7.85) * 300 shares + $4.02 commission
(b) Dividend Income: +$132.00
= $.44 per share x 300 shares
(c) Capital Appreciation (If Discover stock is above $42.50 strike price at the June 19th options expiration): +$540.00
= ($42.50 -$40.70) * 300 shares
Total Net Profit: +$592.98
= (-$79.02 options income +$132.00 dividend income +$540.00 capital appreciation)
Absolute Return: +5.8%
= +$592.98/$10,256.01
Equivalent Annualized Return: +65.9%
= (+$592.98/$10,256.01)*(365/32 days)
