Established Covered Calls in D.R. Horton Inc.

This morning, a Covered Calls position has been established in D.R. Horton Inc. (ticker DHI) with a July 17th, 2020 options expiration date. Three D.R. Horton Call options were sold at $4.60 at the $50.00 strike price when the stock price was $53.43.  The Delta was 75.3 when this transaction was executed -- a moderately in-the-money position which is consistent with the Covered Calls Advisor's current cautious market outlook.  As preferred, the next earnings report on July 28th is after the July 17th options expiration date.

D.R. Horton is the largest homebuilder in America by market cap. Importantly, it is considered the best-in-class operator in its industry and has the highest exposure to the critically important entry-level buyers (67% of closings), lowest debt leverage, and least on-balance sheet land risk.

As detailed below, the potential return-on-investment result is +2.4% absolute return in 19 days (equivalent to a +46.0% annualized return-on-investment).  

D.R. Horton Inc. (DHI) -- New Covered Calls Position

The Buy/Write transaction was as follows:
06/29/2020 Bought 300 shares of D.R. Horton Inc. stock @ $53.43 per share 
06/29/2020 Sold 3 D.R. Horton July 17th, 2020 $50.00 Call options @ $4.60 per share
Note: The Implied Volatility of the Call option was 47.8 when this transaction executed. 

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $14,651.01
= ($53.43 - $4.60) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,380.00
= ($4.60 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If D.R. Horton stock is above $50.00 strike price at July 17th expiration): -$1,029.00
= ($50.00 - $53.43) * 300 shares

Total Net Profit: +$351.00
= (+$1,380.00 options income +$0.00 dividend income -$1,029.00 capital appreciation)

Absolute Return: +2.4%
= +$351.00/$14,651.01
Equivalent Annualized Return: +46.0%
= (+$351.00/$14,651.01)*(365/19 days)

The downside 'breakeven price' at expiration is at $48.83 ($53.43 - $4.60), which is 8.6% below the current market price of $53.43.

June 26th, 2020 Options Expiration -- Financial Select Sector SPDR Fund Covered Calls Position Assigned

The June 26th, 2020 $22.50 Covered Calls position in the Financial Select Sector SPDR Fund expired in-the-money, so the 400 shares of XLF were assigned (i.e. sold) at the $22.50 strike price.  As detailed below, the return-on-investment (ROI) result was  +1.5% absolute return (equivalent to +55.9% annualized return-on-investment for the 10 days holding period).

Financial Select Sector SPDR Fund (XLF) -- Covered Calls Position Assigned at Expiration
The transactions were:

06/17/2020 Bought 400 Financial Select Sector SPDR Fund shares @ $24.31
06/17/2020 Sold 4 XLF 6/26/2020 $22.50 Call options @ $2.00 per share
Note: a simultaneous buy/write transaction was executed.  Open Interest in these Calls was 719 contracts and their Implied Volatility was 49.5 when this position was transacted.
06/22/2020 Ex-dividend of $.1516 per share x 400 shares
06/26/2020 Four Financial Select Sector SPDR Fund Call options expired in-the-money so 400 XLF shares sold at $22.50 strike price.
Note: the XLF share price closed in-the-money at $22.58.
 
The overall performance results (including commissions) for this Financial Select Sector SPDR Fund Covered Calls position were as follows:
Covered Calls Cost Basis: $8,926.68
= ($24.31 - $2.00) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$800.00
= ($2.00 * 400 shares)
(b) Dividend Income: +$60.64
= ($.1516 dividend per share x 400 shares)

(c) Capital Appreciation (XLF shares assigned at $22.50 strike price at options expiration): -$724.00
+($22.50 - $24.31) * 400 shares

Total Net Profit (XLF shares assigned at $22.50 at June 26th, 2020 expiration): +$136.64

= (+$800.00 options income +$60.64 dividend income - $724.00 capital appreciation)

Absolute Return: +1.5%

= +$136.64/$8,926.68

Annualized Return (If XLF shares assigned at $22.50 at June 26th, 2020 expiration): +55.9%

= (+$136.64/$8,926.68)*(365/10 days)

Covered Call Position Established in Deere & Co.

A new Covered Call position was established in Deere & Co. (ticker DE) with a July 17th, 2020 options expiration date.  One hundred shares of Deere & Co. were purchased at $151.36 and one Call option was sold at $9.50 per share at the $145.00 strike price. Given the Covered Calls Advisor's Bearish overall market outlook, an in-the-money strike price was selected with a Delta (a good approximation of the probability of assignment at expiration) of 67.8. There is an ex-dividend date on 6/29 (Monday) of $.76 per share, so capturing this dividend is included in the potential return-on-investment results detailed below.      

A potential return-on-investment result if this position closes in-the-money at the July 17th options expiration date is +2.7% absolute return in 22 days (equivalent to a +45.6% annualized return-on-investment).  


Deere & Co. (DE) -- New Covered Call Position

The transactions were as follows:
06/26/2020 Bought 100 shares of Deere & Co. @ $151.36 per share 
06/26/2020 Sold 1 John Deere July 17th, 2020 $145.00 Call option @ $9.50 per share
Note: the Implied Volatility of the Call option was 40.1 and the next quarterly earnings report on 7/23 is after the 7/17/2020 options expiration date
06/29/2020 Ex-dividend at $.76 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $14,186.67
= ($151.36 - $9.50) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$950.00
= ($9.50 * 100 shares)
(b) Dividend Income: +$76.00
= $.76 per share x 100 shares 
(c) Capital Appreciation (If John Deere stock is above $145.00 strike price at the July 17th options expiration): -$636.00
= ($145.00 -$151.36) * 100 shares

Total Net Profit: +$390.00
= (+$950.00 options income +$76.00 dividend income -$636.00 capital appreciation)

Absolute Return: +2.7%
= +$390.00/$14,186.67
Equivalent Annualized Return: +45.6%
= (+$390.00/$14,186.67)*(365/22 days)

These returns will be achieved if the stock is above the $145.00 strike price at the market closing on the July 17th, 2020 options expiration date.  If the stock declines below the strike price, the breakeven price of $141.10 ($151.36 -$9.50 -$.76) provides 6.8% downside breakeven protection below today's purchase price.

My Investing Pyramid of Success

Note: This article is from a blog post I made on this Covered Calls Advisor blog several years ago.

Recently, I have been doing some soul-searching related to the topic of investing success by asking myself:
What personal qualities are most essential for achieving success in investing?

Before identifying and discussing these qualities, I'd like to clarify my perception of the phrase "success in investing". How do we measure our "success in investing"?
I am convinced that investing success is not an easily defined concept. In fact, since different people have different goals for their investments -- success will be relative, and that is fine. But irrespective of these differences, I'd encourage you to ponder the following question for yourself: What does "investing success" mean for me? Seriously, take the time to think about it, and then write a sentence that defines investing success for you.

I first began to develop my sense of what "investing success" means for me during a course in Engineering Economics in college. There, I learned about: (1) viewing corporate decision-making in terms of its return-on-investment(ROI); and (2) the power of compound interest; and (3) the concept of 'sunk costs'. Shortly thereafter, I began to grasp the applicability of these business concepts to investing when I read "How to Get Rich; Slowly, But Almost Surely: Adventures in Applying the Decision Sciences" by William Thomas Morris. Professor Morris was Chair of the Department of Industrial Engineering at The Ohio State University. In retrospect, this seems to be a mediocre book at best, but for this budding Industrial Engineer it provided some critically important links between my engineering education and my investing future -- but I digress.

So, my personal statement of "investing success" is:
To achieve long-term outperformance compared with the return-on-investment performance of the overall stock market. I won't be more specific now on what is meant by 'long-term', 'outperformance', or 'overall stock market'. These are topics for another time. But again, I encourage you to develop and then to write your own personal statement that defines what is "investing success" for you. After all, the first step toward achieving our own investing success is to define the goal we are seeking.

My thinking and research on this topic led me to identify five key characteristics (identified on my "Investing Pyramid of Success" above) that enable investors to achieve a substantial level of success.  Each of these five qualities is worthy of extensive analysis and discussion. But I will provide only a brief overview of some essential aspects of each characteristic as they pertain to investing. As you consider each one, think about your own strengths and weaknesses in relation to the skills introduced below. The good news is that each of us has an opportunity to improve our abilities in each area if we are willing to work at it.

1. Analytical Skills -- these cornerstone skills are especially important for us Covered Calls investors. Three key competency categories include:
(a) logical thinking -- an ability to think both comprehensively and objectively.
(b) critical analysis -- an ability to distinguish important and accurate information from irrelevant or incorrect information.
(c) quantitative abilities -- two especially important skills are:
           (1) the ability to accurately estimate percent changes in our heads; and
           (2) the ability to conceptualize potential outcomes in terms of their probabilities.

2. Emotional Maturity -- Along with analytical skills, the second cornerstone competency is Emotional Maturity. This quality encompasses:
(a) taking the emotion out of investing; and
(b) facing reality and dealing with it objectively; and
(c) developing confidence in our own independent judgment.

3. Curiosity -- The third 'foundational' quality that complements the cornerstone qualities of analytical skills and emotional maturity is curiosity. This ability is demonstrated by an aggressive willingness and desire to learn new things and to build upon our existing knowledge.

4. Discipline -- It is critically important to establish and follow a well-defined and consistently applied investing process. In short, it is better to seek to become an expert in Covered Calls investing rather than a dilettante in numerous stock and option strategies.

5. Adaptability -- While being 'disciplined' is essential, that does not imply that we should be rigid in our approach. Rather, we should use our 'curiosity' to seek to continually increase our knowledge to improve our own investing processes.

Again, I would strongly encourage you to make an objective self-assessment of your own abilities in each of these areas. Then develop a self-improvement plan that:
- identifies and enables you to focus on a process that will help you achieve your own personalized 'investing success'; and
- utilizes those key qualities that are already your strengths; and
- work to improve on those personal characteristics that you have identified where you need improvement.

The pyramidal format of my "Investing Pyramid of Success" shown above was developed from legendary teacher and basketball coach John Wooden's "The Pyramid of Success".  Below is  a photo of Coach Wooden's "Pyramid" which is prominently displayed on the wall directly above my office desk in my home -- a periodic source of wisdom and inspiration to me over the past several decades.  These are his core concepts about "success" that he taught his players at UCLA -- success in basketball but also in life. 

For a larger view, click on the image above.

Hopefully, this post has provided you some food-for-thought as related to your own investing capabilities and processes.

Best Wishes and Godspeed to All,

Jeff

Established Covered Calls Position in Lincoln National Corp.

Late in this afternoon's trading (9 minutes before the market close), a buy/write limit order in Lincoln National Corp. (ticker LNC) was executed at the Covered Calls Advisors' net debit price of $31.26 per share. Three hundred shares were purchased at $35.91 and three July 17th, 2020 Call options were sold for $4.65 at the $32.50 strike price, therefore a time value of $1.24 = [$4.65 - ($35.91 - $32.50)] per share.  Lincoln Financial Group is the marketing group for LNC and its subsidiaries.

Lincoln National has an upcoming quarterly ex-dividend of $.40 per share on July 9th which is prior to the July 17th options expiration.  This is equivalent to an absolute annualized dividend yield of 4.9% (at the $32.50 strike price) and an equivalent annualized dividend yield of 18.7% = [($.40/$32.50) x (365/24 days to expiration)].  This dividend is included in the detailed return-on-investment calculations below.  An early assignment is possible on the day prior to the ex-dividend date and would be highly desirable result since its annualized return on investment (aroi) would exceed the result if the position is assigned on the July 17th expiration date.

The Implied Volatility (IV) of these Call options was 70.5 when this buy/write transaction was executed -- a surprisingly high IV given that the next earnings report on August 6th is after the July 17th options expiration date.  Consequently, this position provides a very attractive potential annualized return-on-investment (aroi) of +79.8% at expiration.  This aroi is especially impressive since: (1) Lincoln National is a Fortune 250 mid-cap sized and well-diversified insurance company whose market cap is $7.5 billion; and (2) A relatively 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 72.2%.    

Importantly to the Covered Calls Advisor's analysis, all nine criteria of the  Dividend Capture Strategy (see table at end of this post) are met with this position.  The Covered Calls Advisor's current Overall Market Meter outlook remains Bearish meaning that my best estimate is that the stock market will be lower a month from today.  If so, the appropriate Covered Calls strategy is to sell in-the-money strike prices.  Even if the stock market declines during the next month, hopefully the decline will be a moderate one and the stock price of Lincoln National Corp. will not decline below the $32.50 strike price at closing on the July 17th options expiration date, in which case the maximum potential profit in this LNC position would be achieved.   

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

•  +4.0% absolute return (equivalent to +96.5% annualized return for the next 15 days) if the stock is assigned early (business day prior to the July 9th ex-dividend date); OR 

• +5.2% absolute return (equivalent to +79.8% annualized return over the next 24 days) if the stock is assigned on the July 17th options expiration date.

Lincoln National Corp. (LNC) -- New Covered Calls Position
The buy/write transaction was:
06/24/2020 Bought 300 Lincoln National shares @ $35.91
06/24/2020 Sold 3 LNC 7/17/2020 $32.50 Call options @ $4.65
Note: Open Interest in these Calls was 296 contracts and their Implied Volatility was 70.5 when this position was transacted.
07/09/2020 Upcoming quarterly ex-dividend of $.40 per share

Two possible overall performance results (including commissions) for this Lincoln National Covered Calls position are as follows:
Covered Calls Cost Basis: $9,380.01
= ($35.91 - $4.65) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,395.00
= ($4.65 * 300 shares)
(b) Dividend Income (If option exercised early on July 8th, the business day prior to the July 9th ex-div date): +$0.00; or
(b) Dividend Income (If LNC stock assigned at July 17th, 2020 options expiration): +$120.00
= ($.40 dividend per share x 300 shares)

(c) Capital Appreciation (If LNC Call options assigned early on July 8th): -$1,023.00
+($32.50 - $35.91) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $32.50 strike price at options expiration): -$1,023.00
+($32.50 - $35.91) * 300 shares

1. Total Net Profit [If option exercised on July 8th (business day prior to the July 9th ex-dividend date)]: +$372.00

= (+$1,395.00 options income +$0.00 dividend income -$1,023.00 capital appreciation); or

2. Total Net Profit (If LNC shares assigned at $32.50 at July 17th, 2020 expiration): +$492.00

= (+$1,395.00 +$120.00 -$1,023.00)

1. Absolute Return [If option exercised on July 8th (business day prior to ex-dividend date)]: +4.0%

= +$372.00/$9,380.01

Annualized Return (If option exercised early): +96.5%

= (+$372.00/$9,380.01)*(365/15 days); or

2. Absolute Return (If LNC shares assigned on July 17th options expiration date): +5.2%

= +$492.00/$9,380.01

Annualized Return (If LNC shares assigned at $32.50 at July 17th, 2020 expiration): +79.8%

= (+$492.00/$9,380.01)*(365/24 days)

Either outcome provides a very attractive return-on-investment result for this Lincoln National investment.  These returns will be achieved as long as the stock is above the $32.50 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $30.86 ($35.91 -$4.65 -$.40) provides 14.1% downside protection below today's stock purchase price.

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy.  All nine criteria are achieved in this LNC Covered Calls position.

Covered Calls Position Established in SPDR S&P 500 ETF

The CBOE Volatiliy Index (VIX) is based on the S&P 500 options volatility.  Although VIX is down substantially from its high in March, at its current level of 35.4 it remains about twice its historic average in the high teens.  Times like this offer an opportunity for Covered Calls and Cash-Secured Puts investors like ourselves who harvest income available from selling options with currently elevated premiums. 

A new position in the Covered Calls Advisor Portfolio was established in the SPDR S&P 500 ETF (SPY) with a July 2nd, 2020 options expiration date.  Two Covered Calls were established by purchasing 200 shares at $303.37 and selling two Calls at the $290.00 strike price for a premium received of $15.61 per share.  Given the current market volatility and the Covered Calls Advisor's Bearish outlook, a conservative position (Delta of 78.2 when this buy/write transaction was executed) at a strike price 4.4% below the current price of SPY when this position was established.

As detailed below, the potential return-on-investment result is +0.8% absolute return in 9 days (equivalent to a +31.6% annualized return-on-investment)

SPDR S&P 500 ETF (SPY) -- New Covered Calls Position

The buy/write transaction was as follows:
06/24/2020 Bought 200 shares of SPDR S&P 500 ETF @ $303.37 per share 
06/24/2020 Sold 2 SPY July 2nd, 2020 $290.00 Call options @ $15.61 per share
Note: the Implied Volatility of the Call options was 37.8 and its Open Interest was 235 contracts

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $57,553.34
= ($303.37 - $15.61) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$3,122.00
= ($15.61 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SPY is above $290.00 strike price at the July 2nd, 2020 expiration): -$2,674.00
= ($290.00 - $303.37) * 200 shares

Total Net Profit: +$448.00
= (+$3,122.00 options income +$0.00 dividend income -$2,674.00 capital appreciation)

Absolute Return: +0.8%
= +$448.00/$57,553.34
Equivalent Annualized Return: +31.6%
= (+$448.00/$57,553.34)*(365/9 days)

Covered Call Position Established in Alphabet Inc.

A new Covered Call position has been established in Alphabet Inc. (ticker GOOGL) with a July 17th, 2020 options expiration date. One Alphabet Call option was sold at $85.68 at the $1,375.00 strike price when the stock price was $1,437.78.  A moderately in-the-money strike price (4.4% downside to the strike price) was chosen because of the Covered Calls Advisor's Bearish Overall Market Meter outlook.

As detailed below, the potential return-on-investment result is +1.7% absolute return in 24 days (equivalent to a +25.8% annualized return-on-investment).  

Alphabet Inc.(GOOGL) -- New Covered Call Position

The transaction was as follows:
06/24/2020 Bought 100 shares of Alphabet Inc. stock @ $1,437.78 per share 
06/24/2020 Sold 1 Alphabet Inc. July 17th, 2020 $1,375.00 Call option @ $85.68 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call option was 32.2 and the Open Interest was 127 contracts when this transaction was executed. 

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $135,210.67
= ($1,437.78 - $85.68) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$8,568.00
= ($85.68 * 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Alphabet stock is above $1,375.00 strike price at July 17th expiration): -$6,278.00
= ($1,375.00 - $1,437.78) * 100 shares

Total Net Profit: +$2,290.00
= (+$8,568.00 options income +$0.00 dividend income -$6,278.00 capital appreciation)

Absolute Return: +1.7%
= +$2,290.00/$135,210.67
Equivalent Annualized Return: +25.8%
= (+$2,290.00/$135,210.67)*(365/24 days)

The downside 'breakeven price' at expiration is at $1,352.10 ($1,437.78 - $85.68), which is 6.0% below the current market price of $1,437.78.

Established Covered Calls Position in JPMorgan Chase & Co.

Today a Covered Calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $95.81 and two July 17th, 2020 $90.00 Call options were sold at $7.45.  This is a conservative in-the-money position since it is 6.5% above the $90.00 strike price. 

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a quarterly $.90 per share ex-dividend on July 2nd is prior to the July 17th options expiration date.   Even if the stock market declines during the next 24 days until options expiration, if the stock price remains above the $90.00 strike price at assignment, then the maximum potential profit for this JPMorgan Covered Calls position would be achieved.

An additional consideration in this position is that the next quarterly earnings report is on July 14th which is prior to the July 17th options expiration date.  Prior to the earnings report, the Covered Calls Advisor will be monitoring this position closely every day since closing out the position after the ex-dividend date but prior to the earnings date is a likely possibility.
  
As detailed below, two potential return-on-investment results are: 

•  +1.9% absolute return (equivalent to +84.7% annualized return for the next 8 days) if the stock is assigned early (business day prior to the July 2nd ex-dividend date); OR 

• +2.95 absolute return (equivalent to +43.7% annualized return over the next 24 days) if the stock is assigned on the July 17th options expiration date.

JPMorgan Chase & Co. (JPM) -- New Covered Calls Position

Although unlikely, if the current time value (i.e. extrinsic value) of $1.64 [$7.45 option premium - ($95.81 stock price - $90.00 strike price)] remaining in the short call options decays substantially (down to about $.20 or less) by July 1st (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 200 JPM shares away to capture the dividend payment.  As detailed in the Dividend Capture spreadsheet below, early assignment would be the most desired outcome since its +84.7% annualized return-on-investment (aroi) would substantially exceed the +43.7% aroi if assigned on the 7/17/2020 options expiration date.

The buy/write transaction was:
06/24/2020 Bought 200 JPM shares @ $95.81
06/24/2019 Sold 2 JPM 7/17/2020 $90.00 Call options @ $7.45
07/02/2020 Upcoming quarterly ex-dividend of $.90 per share

Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost: $17,673.34
= ($95.81 - $7.45) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$1,490.00
= ($7.45 *200 shares)
(b) Dividend Income (If option exercised early on July 1st, the business day prior to July 2nd ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at July 17th, 2020 expiration): +$180.00
= ($.90 dividend per share x 200 shares)

(c) Capital Appreciation (If JPM assigned early): -$1,162.00
+($90.00 -$95.81)*200 shares; or
(c) Capital Appreciation (If JPM assigned at $90.00 strike price at expiration): -$1,162.00
+($90.00-$95.81) * 200 shares

1. Total Net Profit [If option exercised on July 1st (business day prior to July 2nd ex-dividend date)]: +$328.00

= (+$1,490.00 options income +$0.00 dividend income -$1,162.00 capital appreciation); or

2. Total Net Profit (If JPM assigned at $90.00 at July 17th, 2020 expiration): +$508.00

= (+$1,490.00 options income +$180.00 dividend income -$1,162.00 capital appreciation)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.9%

= +$328.00/$17,673.34

Annualized Return (If option exercised early): +84.7%

= (+$328.00/$17,673.34)*(365/8 days); or

2. Absolute Return (If JPM assigned at $90.00 at July 17th, 2020 expiration): +2.9%

= +$508.00/$17,673.34

Annualized Return (If JPM assigned at $90.00 at July, 17th 2020 expiration): +43.7%

= (+$508.00/$17,673.34)*(365/24 days)

Either outcome provides a very good return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $90.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $87.46 ($95.81 -$7.45 -$.90) provides 8.7% downside protection below today's purchase price.

There is a 72.4% probability that the Calls will be above the $90.00 strike price at options expiration.  If so, the +43.7%  annualized roi profit detailed above would be achieved.

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy.  Eight of the nine criteria are achieved in this case.
Note: there has recently been a modification to Criteria #3 below.  Previously, the "Annual Dividend Yield (at the Strike Price) metric was > 1.5%.  This criteria is now adjusted relative to the total days until expiration, so it now reads the "Equivalent Annualized Dividend Yield (at the strike price) exceeds 6.0%."  For this JPM position, the Equivalent Annualized Dividend Yield of 15.2% [calculated as ($.90/$90.00) x (365/24 days)] provides a very attractive yield for this Covered Calls position that is well above the minimum 6.0% threshold. 

Established Covered Calls in Micron Technology Inc.

A Covered Calls position has been established in Micron Technology Inc. (ticker MU) with a July 17th, 2020 options expiration date. Three Micron Technology Call options were sold at $5.90 at the $45.00 strike price when the stock price was $49.72.  The Delta was 76.2 when this transaction was executed -- a moderately in-the-money position which is consistent with the Covered Calls Advisor's current cautious market outlook.

As detailed below, the potential return-on-investment result is +2.7% absolute return in 25 days (equivalent to a +39.3% annualized return-on-investment).  

Micron Technology Inc. (MU) -- New Covered Calls Position

The Buy/Write transaction was as follows:
06/23/2020 Bought 300 shares of Micron Technology Inc. stock @ $49.72 per share 
06/23/2020 Sold 3 Micron July 17th, 2020 $45.00 Call options @ $5.90 per share
Note 1: The Implied Volatility of the Call option was very high at 57.7 which is understandable given the elevated uncertainty related to Micron's upcoming quarterly earnings report on June 29th.
Note 2: The Open Interest was 6,142 contracts when this transaction was executed. 

Two possible overall performance results (including commissions) would be as follows:
Covered Call Cost Basis: $13,148.01
= ($49.72 - $5.90) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,770.00
= ($5.90 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Micron stock is above $45.00 strike price at July 17th expiration): -$1,416.00
= ($45.00 - $49.72) * 300 shares

Total Net Profit: +$354.00
= (+$1,770.00 options income +$0.00 dividend income -$1,416.00 capital appreciation)

Absolute Return: +2.7%
= +$354.00/$13,148.01
Equivalent Annualized Return: +39.3%
= (+$354.00/$13,148.01)*(365/25 days)

The downside 'breakeven price' at expiration is at $43.82 ($49.72 - $5.90), which is 11.9% below the current market price of $49.72.

Closed Covered Calls Position in ConocoPhillips

At the June 19th options expiration last Friday, the Covered Calls position in ConocoPhillips expired with the stock price below the $44.00 strike price. This morning, very soon after the market opened, the 300 shares of ConocoPhillips in the Covered Calls Advisor Portfolio were sold with a market order than executed at $43.35 per share.

As detailed below, the return-on-investment result for this ConocoPhillips Covered Calls position was +0.5% absolute return in 12 days (equivalent to a +16.2% annualized return-on-investment).  This result is a good example of the advantage that can accrue from selling in-the-money Covered Calls.  Despite the stock declining by 6.8% (from $46.50 purchase price to $43.35 sale price), a small profit was still achieved from this position.


ConocoPhillips (COP) -- New Covered Calls Position

The transactions were as follows:
06/10/2020 Bought 300 shares of ConocoPhillips stock @ $46.50 per share 
06/10/2020 Sold 3 ConocoPhillips June 19th, 2020 $44.00 Call options @ $3.38 per share
Note: this was a simultaneous Buy/Write transaction.  The Open Interest is 1,997 contracts in these Call options and their Implied Volatility was 55.4 when this transaction was executed.
6/19/2020 3 COP 6/19 Calls expired with closing stock price of $43.70 below the $44.00 strike price.
6/22/2020 Sold 300 shares of COP at $43.35 right after market open.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $12,938.01
= ($46.50 - $3.38) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,014.00
= ($3.38 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (COP shares sold at $43.35): -$945.00
= ($43.35 -$46.50) * 300 shares

Total Net Profit: +$69.00
= (+$1,014.00 options income +$0.00 dividend income -$945.00 capital appreciation)

Absolute Return: +0.5%
= +$69.00/$12,938.01
Equivalent Annualized Return: +16.2%
= (+$69.00/$12,938.01)*(365/12 days)

June 19th, 2020 Options Expiration Results

The Covered Calls Advisor Portfolio had thirteen positions with June 19th, 2020 options expirations. Twelve of the positions closed in-the-money and one closed out-of-the-money.  For the twelve closed positions, the maximum potential return-on-investment results were achieved as follows:

• Alphabet Inc. (GOOGL) -- +1.9% absolute return (equivalent to +29.3% annualized) for the 24 days of this investment  
• American International Group Inc. (AIG) Position #1 -- +3.9% absolute return (equivalent to +67.2% annualized) for the 23 days of this investment
• American International Group Inc. (AIG) Position #2 -- +2.5% absolute return (equivalent to +103.2% annualized) for the 9 days of this investment  
• Borg Warner Inc. (BWA) -- +3.0% absolute return (equivalent to +38.0% annualized) for the 29 days of this investment
• Discover Financial Services (DFS) -- +5.8% absolute return (equivalent to +65.9% annualized) for the 32 days of this investment
• Exelon Corporation (EXC) -- +3.8% absolute return (equivalent to +34.3% annualized) for the 40 days of this investment  
• Goldman Sachs Group (GS) -- +4.6% absolute return (equivalent to +58.3% annualized) for the 29 days of this investment  
• International Paper Inc. (IP) -- +2.7% absolute return (equivalent to +34.4% annualized) for the 29 days of this investment
• Micron Technology Inc. (MU) Position #1 -- +3.4% absolute return (equivalent to +33.1% annualized) for the 38 days of this investment  
• Micron Technology Inc. (MU) Position #2 -- +2.2% absolute return (equivalent to +45.0% annualized) for the 18 days of this investment
• Tyson Foods Inc. (TSN) -- +2.3% absolute return (equivalent to +27.4% annualized) for the 30 days of this investment
• ViacomCBS Inc. (VIAC) -- +3.3% absolute return (equivalent to +69.9% annualized) for the 17 days of this investment

The cash now available will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Given the Covered Calls Advisor's Overall Market Meter outlook of  'Bearish', new positions will be hedged by establishing Covered Calls at moderately in-the-money strike prices with good downside protection, that being normally at deltas greater than 70.

The ConocoPhillips Covered Calls position at the $44.00 strike price closed out-of-the-money at $43.70 at options expiration.  So, the 3 June 19th Call options expired and the 300 COP shares remain in the Covered Calls Advisor Portfolio.  A decision will be made very soon (probably this Monday) to either sell the shares or to continue with Covered Calls positions by selling Call options against the shares currently held.  Right now, selling the shares is most likely since the stock was purchased at $46.50 and closed yesterday at $43.70 (6.0% below the purchase price) while over the same time period the price of WTI crude oil increased slightly from $38.73 to $39.43.  More importantly, Conoco's CEO recently stated that any significant production increases are likely a few more months away and only if the oil price continues to rebound.  As always, transactions in the Covered Calls Advisor Portfolio will be posted on this blog on the same day they occur. 

As always, please email me at partlow@cox.net with any questions or comments related specifically to this post or to anything else related to Covered Calls investing.

Best Wishes and Godspeed,
Jeff Partlow

Established Covered Calls Position in Bristol-Myers Squibb Co.

Today a Covered Calls position was established in Bristol-Myers Squibb Co. (ticker symbol BMY) when the Covered Calls Advisor's buy/write limit order was executed -- 500 shares were purchased at $54.85 and five July 17th, 2020 Call options were sold at $5.46 at the $50.00 strike price.  This is a conservative in-the-money position since it is 8.8% above the $50.00 strike price. 

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a quarterly $.45 per share ex-dividend on July 2nd is prior to the July 17th options expiration date.   Even if the stock market declines during the next 29 days until options expiration, hopefully the decline will be a moderate one and the stock price of  Bristol-Myers will not decline below its $50.00 strike price at closing on the July 17th options expiration date.  If so, the maximum potential profit in this Bristol-Myers position would be achieved.  Another positive feature of this position is that the next quarterly earnings report on August 6th is after the July 17th options expiration date.  
Bristol-Myers is rated as a Moderate Buy by analysts.  Reuters Research indicates that currently 10 analysts have a Buy or Outperform rating, 5 have a Hold, and none have an Underperform or Strong Sell; and their average target price is $66.44 (21.1% above today's purchase price).  Importantly, most of their fundamental valuation metrics (including various cash flow metrics) are currently better than their prior 5-year average.  On the down side, Bristol-Myers added substantial long-term debt to its Balance Sheet when it acquired Celgene late last year and its current returns on invested capital (roic) are low.  However, Morningstar's commentary in support of their wide moat rating is compelling and describes how they are positioned to improve their roic in the near-term future: "Based on a wide lineup of patent-protected drugs, an entrenched salesforce, and economies of scale, Bristol holds a wide economic moat.  The patent protection allows the firm to price its drugs at levels that translate into superior returns on invested capital compared with its cost (particularly in cancer drugs, an area of focus for Bristol).  The patents also provide Bristol with ample time to bring forward the next generation of new drugs.  Additionally, several of their currently marketed drugs are biologics, which create additional hurdles for generic small molecules.  Further, because many small drug companies lack a distribution channel, Bristol's entrenched salesforce enables the company to partner with these smaller drug companies to gain access to externally created drugs, augmenting its internal drug-development efforts.  Additionally, their sheer size generates the strong and stable cash flows required to fund the approximately $800 million needed, on average, to bring each new drug to the market."  

Although the Covered Calls Advisor depends primarily on fundamental valuation and competitive position factors in deciding what stocks to purchase, a minor consideration is given to technical factors.  In that regard, BMY stock was down 2.0% today from yesterday's closing price and the 2-day relative strength index [i.e. RSI(2)] for Bristol-Myers moved into short-term oversold territory this morning and declined to a very low 12.3 reading at 12:21p.m. when this buy/write limit order was executed.  Note: below 30 is considered 'oversold' and above 70 is considered 'overbought'.

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

•  +1.2% absolute return (equivalent to +34.7% annualized return for the next 13 days) if the stock is assigned early (business day prior to the July 2nd ex-dividend date); OR 

• +2.1% absolute return (equivalent to +27.0% annualized return over the next 29 days) if the stock is assigned on the July 17th options expiration date.

Bristol-Myers Squibb Co. (BMY) -- New Covered Calls Position
The buy/write transaction was:

06/19/2020 Bought 500 Bristol-Myers Squibb Co. shares @ $54.85
06/19/2020 Sold 5 BMY 7/17/2020 $50.00 Call options @ $5.46
Note: The Call options' Implied Volatility was 40.4 when this position was transacted and the Open Interest was 385 contracts.
07/02/2020 Upcoming quarterly ex-dividend of $.45 per share

Two possible overall performance results (including commissions) for this Bristol-Myers Squibb Co. Covered Calls position are as follows:
Covered Calls Cost Basis: $24,698.35
= ($54.85 - $5.46) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$2,730.00
= ($5.46 * 500 shares)
(b) Dividend Income (If option exercised early on July 1st, the business day prior to the July 2nd ex-div date): +$0.00; or
(b) Dividend Income (If BMY stock assigned at July 17th, 2020 options expiration): +$225.00
= ($.45 dividend per share x 500 shares)

(c) Capital Appreciation (If BMY Call options assigned early on July 1st): -$2,425.00
+($50.00 - $54.85) * 500 shares; or
(c) Capital Appreciation (If shares assigned at $50.00 strike price at options expiration): -$2,425.00
+($50.00 - $54.85) * 500 shares

1. Total Net Profit [If option exercised on July 1st (business day prior to the July 2nd ex-dividend date)]: +$305.00

= (+$2,730.00 options income +$0.00 dividend income -$2,425.00 capital appreciation); or

2. Total Net Profit (If BMY shares assigned at $50.00 at July 17th, 2020 expiration): +$530.00

= (+$2,730.00 options income +$225.00 dividend income -$2,425.00 capital appreciation)

1. Absolute Return [If option exercised on July 1st (business day prior to ex-dividend date)]: +1.2%

= +$305.00/$24,698.35

Annualized Return (If option exercised early): +34.7%

= (+$305.00/$24,698.35)*(365/13 days); or

2. Absolute Return (If BMY shares assigned at $50.00 at July 17th, 2020 options expiration): +2.1%

= +$530.00/$24,698.35

Annualized Return (If BMY shares assigned at $50.00 at July 17th, 2020 expiration): +27.0%

= (+$530.00/$24,698.35)*(365/29 days)

Either outcome provides a good annualized return-on-investment result for this Bristol-Myers investment.  These returns will be achieved as long as the stock is above the $50.00 strike price on the options expiration date.  However, if the stock declines below the strike price, the breakeven price of $48.94 ($54.85 -$5.46 -$.45) provides 10.8% downside protection below today's stock purchase price.

There is a 79.6% probability that the Calls will be above the $50.00 strike price at options expiration.  If so, the maximum potential profit detailed above would be achieved.

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy.  All nine criteria are achieved in this case.
Note: there has recently been a modification to Criteria #3 below.  Previously, the "Annual Dividend Yield (at the Strike Price) metric was > 1.5%.  This criteria is now adjusted relative to the total days until expiration, so it now reads the "Equivalent Annualized Dividend Yield (at the strike price) exceeds 6.0%."  For this BMY position, the Equivalent Annualized Dividend Yield of 11.3% [calculated as ($.45/$50.00) x (365/29 days)] achieves the objective in this case since it exceeds the minimum 6.0% threshold criteria. 

Covered Calls Position Established in Fifth Third Bancorp

With funds available from the early assignment of the Taiwan Semiconductor Covered Calls position, a new Covered Calls position was established this morning in Fifth Third Bancorp (ticker FITB).  Five hundred shares of Fifth Third Bancorp were purchased at $21.92 and 5 July 17th, 2020 $19.00 strike price Call options were sold at $3.38, thus a time value of $.46 [$3.38 - ($21.92 - $19.00)] per share.  This is the first July monthly options position established in the Covered Calls Advisor Portfolio. 

Two days ago, Fifth Third Bank announced an upcoming quarterly dividend of $.27 per share with an ex-dividend date of June 29th.  This is equivalent to an absolute annualized dividend yield of 5.4% (at the $20.00 strike price) and an equivalent annualized dividend yield of 16.4% = [($.27/$20.00) x (365/30 days to expiration)].  This dividend is included in the detailed return-on-investment calculations below.  An early assignment is possible on the day prior to the ex-dividend date and would be highly desirable result since its annualized return on investment (aroi) would greatly exceed the result if the position is assigned on the July 17th expiration date.  However, early assignment is unlikely, so the details of this outcome will only be provided on this blog if and when the position is assigned early.       

The Implied Volatility (IV) of these Call options was 64.8 when this buy/write transaction was executed -- a surprisingly high IV given that the next earnings report on July 23rd is after the July 17th options expiration date.  Consequently, this position provides an attractive potential annualized return-on-investment (aroi) of +47.9% at expiration.  This aroi is especially impressive since: (1) Fifth Third Bank is a relatively large regional bank with a market cap of $15.3 billion; and (2) A relatively conservative in-the-money Covered Calls position was established with a delta (which provides a good approximation of the probability of assignment at expiration) is 66.5%.    

A potential return-on-investment result if this position closes in-the-money at the July 17 options expiration date is +3.9% absolute return in 30 days (equivalent to a +47.9% annualized return-on-investment).   


Fifth Third Bancorp (FITB) -- New Covered Calls Position

The transactions were as follows:
06/18/2020 Bought 500 shares of Fifth Third Bancorp @ $21.92 per share 
06/18/2020 Sold 5 Fifth Third Bancorp July 17th, 2020 $19.00 Call options @ $2.92 per share
06/29/2020 Ex-dividend of $.27 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $9,273.35
= ($21.92 - $3.38) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$1,690.00
= ($3.38 * 500 shares)
(b) Dividend Income: +$135.00
= $.27 per share x 500 shares 
(c) Capital Appreciation (If Fifth Third Bancorp stock is above $19.00 strike price at the July 17th options expiration): -$1,460.00
= ($19.00 -$21.92) * 500 shares

Total Net Profit: +$365.00
= (+$1,690.00 options income +$135.00 dividend income -$1,460.00 capital appreciation)

Absolute Return: +3.9%
= +$365.00/$9,273.35
Equivalent Annualized Return: +47.9%
= (+$365.00/$9,273.35)*(365/30 days)

These returns will be achieved as long as the stock is above the $20.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $18.77 ($21.38 -$2.34 -$.27) provides 12.2% downside breakeven protection below today's purchase price.

Early Assignment of Taiwan Semiconductor Manufacturing Co. Ltd. Covered Calls

Before market open this morning, I received email and text notifications from my broker (Schwab) that all three Taiwan Semiconductor (ticker symbol TSM) Call options were exercised early, so the 300 shares of Taiwan Semiconductor stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $53.00 strike price. 

Details of the transactions and the results for this Taiwan Semiconductor position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $.50 = [$2.46 options premium - ($54.96 stock price - $53.00 strike price)].  By yesterday's market close (the last business day prior to the June 18th, 2020 ex-dividend date), the time value had declined to $0.3705; so, the full $.50 options income profit per share potential was achieved upon the early assignment closing of this position.  The per share price has increased from $54.96 when the position was originally established (on June 8th) to $56.1795 at yesterday's market close.  The owner of the Calls exercised their option to buy the shares at the $53.00 strike price in order to capture the $.4205 dividend.  As detailed below, this early assignment provided a return-on-investment (roi) result for the Covered Calls Advisor Portfolio of +1.0% absolute return (equivalent to +34.8% annualized roi for the 10 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 details of any new transactions will be posted on this blog site the same day that they occur.  The detailed results for this Taiwan Semiconductor position are provided below.


Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) -- Covered Calls Position Closed by Early Assignment
The transactions are:

06/08/2020 Bought 300 Taiwan Semiconductor shares @ $54.96
06/08/2020 Sold 3 TSM 6/26/2020 $53.00 Call options @ $2.46
Note: a simultaneous buy/write transaction was executed.  The Implied Volatility was 24.7 when this position was transacted.
06/17/2020 Early exercise of 3 TSM June 26th, 2020 $53.00 Call options, so 300 Taiwan Semiconductor shares were assigned (i.e. sold) at the $53.00 strike price.

The overall performance result (including commissions) for this Taiwan Semiconductor Covered Calls position was as follows:
Covered Calls Cost Basis: $15,752.02
= ($54.96 - $2.46) * 300 shares + $2.02 commission

Net Profit Components:
(a) Options Income: +$738.00
= ($2.46 * 300 shares)
(b) Dividend Income (Call options exercised early on June 17th, the business day prior to the June 18th ex-div date): +$0.00

(c) Capital Appreciation (TSM Call options assigned early on June 17th): -$588.00
+($53.00 - $54.96) * 300 shares

Total Net Profit: +$150.00

= (+$738.00 options income +$0.00 dividend income -$588.00 capital appreciation)

Absolute Return: +1.0%

= +$150.00/$15,752.02

Annualized Return: +34.8%

= (+$150.00/$15,752.02)*(365/10 days); or

Established Covered Calls Position in the Financial Select Sector SPDR Fund

Today a Covered Calls position was established in the Financial Select Sector SPDR Fund (ticker symbol XLF) when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $24.31 and four June 26th, 2020 Call options were sold at $2.00 and at the $22.50 strike price.

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since an estimated $.13 per share ex-dividend on June 22nd is prior to the June 26th options expiration date.  The Covered Calls Advisor prefers to utilize the Dividend Capture Strategy for positions in the Financial, Energy, Utilities, and Real Estate sectors by establishing Covered Calls during the month each quarter when they go ex-dividend.  Of the eleven sectors, these four are the most highly regulated by primarily the Federal but also by State and Local governments and many companies within each of these sectors pay dividends in excess of that of the overall market.  With this approach, there is a good possibility of capturing the dividend and achieving potential annualized-return-on-investment results that are comparable to those of the often more volatile companies in sectors that are less stable than those in the Financial, Energy, Utilities, and Real Estate sectors.  

With the Covered Calls Advisor's current Overall Market Meter outlook being Bearish, the appropriate Covered Calls strategy is to sell in-the-money strike prices.  Even if the stock market declines during the next ten days, if  the price of the Financial Select Sector SPDR Fund shares are  above the $22.50 strike price at market closing on the June 26th options expiration date, then the maximum potential profit in this XLF position will be achieved.   

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

•  +0.9% absolute return (equivalent to +62.2% annualized return on investment for the next 5 days) if the Financial Select Sector SPDR Fund shares are assigned early (business day prior to the June 22nd ex-distribution date); OR 

• +1.4% absolute return (equivalent to +52.3% annualized return over the next 10 days) if the Financial Select Sector SPDR Fund shares are assigned on the June 26th options expiration date.

Financial Select Sector SPDR Fund (XLF) -- New Covered Calls Position
The transactions are:

06/17/2020 Bought 400 Financial Select Sector SPDR Fund shares @ $24.31
06/17/2020 Sold 4 XLF 6/26/2020 $22.50 Call options @ $2.00 per share
Note: a simultaneous buy/write transaction was executed.  Open Interest in these Calls was 719 contracts and their Implied Volatility was 49.5 when this position was transacted.
06/22/2020 Estimated upcoming quarterly ex-dividend of $.13 per share.  The amount of the XLF dividend will not be declared until this Friday (the business day prior to the 6/22 ex-dividend date).  This $.13 estimate is similar to, but slightly less than, the $.1395 distribution from the same quarter last year.

Two possible overall performance results (including commissions) for this Financial Select Sector SPDR Fund Covered Calls position are as follows:
Covered Calls Cost Basis: $8,926.68
= ($24.31 - $2.00) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$800.00
= ($2.00 * 400 shares)
(b) Dividend Income (If option exercised early on June 19th (this Friday), the business day prior to the June 22nd ex-dividend date): +$0.00; or
(b) Dividend Income (If XLF shares are assigned at June 26th, 2020 options expiration): +$52.00
= ($.13 dividend per share x 400 shares)

(c) Capital Appreciation (If XLF Call options assigned early on June 19th): -$724.00
+($22.50 - $24.31) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $22.50 strike price at options expiration): -$724.00
+($22.50 - $24.31) * 400 shares

1. Total Net Profit [If option exercised on June 19th (business day prior to the June 22nd ex-distribution date)]: +$76.00

= (+$800.00 options income +$0.00 dividend income -$724.00 capital appreciation); or

2. Total Net Profit (If XLF shares assigned at $22.50 at June 26th, 2020 expiration): +$128.00

= (+$800.00 options income +$52.00 dividend income - $724.00 capital appreciation)

1. Absolute Return [If option exercised on June 19th (business day prior to ex-distribution date)]: +0.9%

= +$76.00/$8,926.68

Annualized Return (If option exercised early): +62.2%

= (+$76.00/$8,926.68)*(365/5 days); or

2. Absolute Return (If XLF shares assigned at $22.50 at June 26th, 2020 options expiration): +1.4%

= +$128.00/$8,926.68

Annualized Return (If XLF shares assigned at $55.00 at June 26th, 2020 expiration): +52.3%

= (+$128.00/$8,926.68)*(365/10 days)

Either outcome provides a very attractive annualized return-on-investment result for this Financial Select Sector SPDR Fund investment.  These returns will be achieved as long as the stock is above the $22.50 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $22.18 ($24.31 -$2.00 -$.13) provides 8.8% downside protection below today's stock purchase price.

There is a 82.1% probability that the Calls will be above the $22.50 strike price at options expiration and thus the maximum potential profit would be achieved.

At least eight of the nine 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 Financial Select Sector SPDR Fund position, eight of the nine criteria are met.

Covered Calls Position #2 Established in American International Group Inc.

A new Covered Calls position was established in American International Group Inc. (ticker AIG). Three hundred shares of American International Group were purchased at $32.1575 and 3 June 19th, 2020 $30.00 strike price Call options were sold at $2.59, so a time value of $.4325 [$2.59 - ($32.1575 - $30.00)] per share.

As with the Applied Materials and the Discover Financial Covered Calls positions established on May 19th, 2020, AIG goes ex-dividend tomorrow so capturing this dividend is included in the potential return-on-investment results detailed below.  This is the second AIG Covered Calls position established with a June 19th expiration date. The prior position was established at the $29.00 strike price and was posted here (see link).

The Implied Volatility of these Call options was at 56.5 when this transaction executed and there is no earnings report prior to the June 19th options expiration date; so selling these options provided an attractive options premium income of $2.59 per share and at a time value (aka extrinsic value) of $.4325 per share.  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 75.3%.    

As detailed below, a potential return-on-investment result if this position closes in-the-money at the June 19th options expiration date is +2.5% absolute return in 9 days (equivalent to a +103.2% annualized return-on-investment).   


American International Group Inc. (AIG) -- New Covered Calls Position #2 in AIG

The Buy/Write transaction was as follows:
06/11/2020 Bought 300 shares of American International Group Inc. @ $32.1575 per share 
06/11/2020 Sold 3 American International Group June 19th, 2020 $30.00 Call options @ $2.59 per share
Note: the Open Interest in these Call options was 1,044 contracts. 
06/12/2020 Ex-dividend date at $.32 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $8,872.26
= ($32.1575 - $2.59) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$777.00
= ($2.59 * 300 shares)
(b) Dividend Income: +$96.00
= $.32 per share x 300 shares 
(c) Capital Appreciation (If American International Group stock is above $30.00 strike price at the June 19th options expiration): -$647.25
= ($30.00 -$32.1575) * 300 shares

Total Net Profit: +$225.75
= (+$777.00 options income +$96.00 dividend income -$647.25 capital appreciation)

Absolute Return: +2.5%
= +$225.75/$8,872.26
Equivalent Annualized Return: +103.2%
= (+$225.75/$8,872.26)*(365/9 days)

These returns will be achieved as long as the stock is above the $30.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $29.2475 ($32.1575 -$2.59 -$.32) provides 9.0% downside breakeven protection below today's purchase price.

Covered Calls Position Established in ConocoPhillips

A new Covered Calls position has been established in ConocoPhillips (ticker COP) with a June 19th, 2020 options expiration date. Three ConocoPhillips Call options were sold at $3.38 at the $44.00 strike price when the stock price was $46.50.  Importantly, there is no quarterly earnings report prior to the expiration date.     

ConocoPhillips is one of the largest Oil and Gas Exploration and Production (E&P) companies in the U.S. and its Balance Sheet is among the strongest in the Energy sector.  Two fundamental metrics the Covered Calls Advisor uses when evaluating Energy companies are the trailing twelve months: (1) price to tangible book value ratio, and (2) total debt to equity ratio.  These are currently at attractive levels for COP (1.68 and 47.8 respectively).   In addition to its fundamentals, COP was also attractive on a technical basis.  The 2-day Relative Strength Indicator [RSI(2)] had declined to oversold (readings below 30) territory -- 24.0 today when this position was established. 

In addition, Energy Sector companies are currently especially speculative given the wild price swings in WTI Crude this year and the fact that its current spot price around $38 is still below the average price during any of the past 10 years (see St. Louis Fed chart below).   Given this speculative environment, any Covered Calls position in the Energy sector must first provide an extraordinarily high reward (i.e. potential annualized-return-on-investment) to adequately compensate for the high risk of investing at the current time in this sector.  A second good way to moderate the risk is to substantially hedge the stock purchase by establishing a moderately deep in-the-money position with substantial downside protection to the stock's breakeven price -- which for the current position is 7.3% below the $46.50 purchase price.  Both of these objectives are achieved with this position.
      

As detailed below, a potential return-on-investment result is +2.0% absolute return in 10 days (equivalent to a +74.5% annualized return-on-investment).  The specifics for this position are as follows:


ConocoPhillips (COP) -- New Covered Calls Position

The transactions were as follows:
06/10/2020 Bought 300 shares of ConocoPhillips stock @ $46.50 per share 
06/10/2020 Sold 3 ConocoPhillips June 19th, 2020 $44.00 Call options @ $3.38 per share
Note: this was a simultaneous Buy/Write transaction.  The Open Interest is 1,997 contracts in these Call options and their Implied Volatility was 55.4 when this transaction was executed. 

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $12,938.01
= ($46.50 - $3.38) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,014.00
= ($3.38 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If COP stock is above $44.00 strike price at June 19th expiration): -$750.00
= ($44.00 -$46.50) * 300 shares

Total Net Profit: +$264.00
= (+$1,014.00 options income +$0.00 dividend income -$750.00 capital appreciation)

Absolute Return: +2.0%
= +$264.00/$12,938.01
Equivalent Annualized Return: +74.5%
= (+$264.00/$12,938.01)*(365/10 days)

Exploiting Our Covered Calls Investing "Edges"

For any given investing strategy, the investor should be able to identify any and all discernible advantages that particular strategy has when compared against a basic stocks buy-and-hold approach. Once these potential advantages are identified, it is important to establish an investing process that attempts to fully exploit these advantages. The term that this Covered Calls Advisor prefers for these specific advantages is our investing "edges".  Identifying and then establishing an informed and disciplined investing process to exploit these "edges" is what enables us to attain additional profit beyond that which would otherwise be obtained through a passive buy-and-hold strategy.

Consider these related words of wisdom from two renowned investors:
- Seth Klarman:
"We believe that while investors need to focus great attention on the fundamentals, they must simultaneously answer the question: What's your edge? To succeed in today's overcrowded environment, investors need an edge, an advantage over the competition, to help them allocate their scarce time. Since most everyone has access to complete and accurate databases, powerful computers, and well-trained analytical talent, these resource provide less and less of a competitive edge; they are necessary but not sufficient. You cannot have an edge doing what everyone else is doing; to add value you must stand apart from the crowd. And when you do, you benefit from watching the competition at work."

- George Soros:
"Investors operate with limited funds and limited intelligence; they don't need to know everything.  As long as they understand something better than others, they have an edge."

So what are our "edges" as Covered Calls investors?  It is this advisor's belief that there are six primary edges, each of which provides an opportunity to achieve excess returns:

1. Specialize in Covered Calls Investing -- Here is the introduction to one of my prior blog posts: "One of the most important investing lessons I've learned is to select an investing strategy that you are most comfortable with and stay with it. That is, do not try to be "a jack-of-all-trades and a master of none." Instead, try to continually increase your knowledge related to the strategy you are using and seek to become an expert at it." This fundamental approach in combination with the performance results achieved is what has sustained my commitment to Covered Calls investing during the past four decades -- thus this Covered Calls Advisor's investing motto of "Stick with Covered Calls."
Committing to a path of becoming a passionate, lifelong learner of Covered Calls investing will provide you an advantage that will result in large profits in the years ahead.  I hope you agree and decide to make Covered Calls the investing approach you will focus on to achieve your clear investing "edge".

2. Value-Oriented Stock Selection -- Good stock selection is Job #1 for the Covered Calls investor. Unlike broad-based indices such as the S&P 500 or BXM, we seek to purchase only value-oriented individual equities, which are likely to continue in the future (as they have historically), to outperform the broader indices (such as the S&P 500).

3. Adjust Moneyness of Strike Prices -- As active Covered Calls investors, we have the flexibility to sell out-of-the-money Covered Calls when our outlook is more bullish and in-the-money when bearish; whereas the mechanical indices sell the same moneyness every month (for example, only at-the-money calls in the case of BXM). With even modest success at adjusting moneyness to coincide with our overall market outlook, incrementally better return results are achieved.

4. Active Management -- The typical buy-and-hold investing strategy is a passive investing approach since stocks or mutual funds are normally purchased and held for a period of years. Likewise, Covered Calls investing can also be deployed passively, and passive Covered-Calls-related indices (for example BXM, BXY, and PUT) have been developed. Research has shown that the long-term returns performance of these indices are approximately equivalent to that of a comparable buy-and-hold investment. But as individual investors, we have the opportunity to be "active" (contrasted with "passive") managers of our Covered Calls portfolios. As active managers, an associated "edge" comes from making timely adjustments (for example, position rolling decisions) related to our existing Covered Calls positions.

5. Sell Higher-Than-Average Volatility -- Because of the large-cap nature and the wide diversification inherent in the S&P 500 index, its Volatility Index(VIX) is lower than most individual stocks. Selling options on individual equities (with somewhat higher implied volatility than VIX) provides Covered Calls investors with somewhat higher options income (and thus somewhat higher overall portfolio returns) than would be achieved by either (1) buy-and-hold investing directly in the S&P 500; or (2) selling S&P 500 options (such as is done with the BXM, BXY, and PUT indices).

6. Exploiting the Volatility Risk Premium -- Academic research has demonstrated that the Implied Volatility of option prices is, on average, higher than the actual realized volatility. Thus, by selling options to establish our Covered Calls positions (NOT buying options), we Covered Calls investors exploit this effect (another "edge" versus buy-and-hold investors) and profit from it.

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From my experience, my best estimate is that over a long-term investing horizon (say 10+ years), a disciplined Covered Calls investor that is cognizant of and works to take advantage of the six "edges" described above can expect (on average over the years), to outperform a buy-and-hold benchmark by about 3% to 5% per year. This extra return might not sound especially impressive, but the power of compounding investment returns is substantial. Suppose that over the next decade a buy-and-hold S&P 500 investor averages an 8% annualized return while a Covered Calls investor averages a 12% annualized return. Then, an initial $100,000 portfolio would grow (if done in a tax-advantaged account such as an IRA) over the next 10 years, to about $215,900 for a buy-and-hold portfolio; but to $310,600 for the Covered Calls portfolio. Whereas individually, each of the six "edges" described above provides a small advantage, deployed together they provide a very significant advantage to us Covered Calls investors.
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If you have any comments or questions on this article or anything related to Covered Calls investing, please email me partlow@cox.net. Your comments are always welcomed.

Regards and Godspeed,
Jeff

Established Covered Calls Position in Taiwan Semiconductor Manufacturing Co. Ltd.

Today a Covered Calls position was established in Taiwan Semiconductor Manufacturing Co. Ltd. (ticker symbol TSM) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $54.96 and three June 26th, 2020 Call options were sold at $2.46 at the $53.00 strike price.  Taiwan Semiconductor is the largest semiconductor company in the world by market cap, currently slightly higher than Intel Corp.

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a semi-annual $.4205 per share ex-dividend on June 18th is prior to the June 26th options expiration date.  The Covered Calls Advisor's current Overall Market Meter outlook remains Bearish, so the appropriate Covered Calls strategy is to sell in-the-money strike prices.  Even if the stock market declines during the next 19 days, hopefully the decline will be a moderate one and the stock price of Taiwan Semiconductor will not decline below its $53.00 strike price at closing on the June 26th options expiration date, in which case the maximum potential profit in this Taiwan Semiconductor position would be achieved.  Importantly, the next quarterly earnings report on July 16th is after the June 26th options expiration date.  

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

•  +1.0% absolute return (equivalent to +34.8% annualized return for the next 10 days) if the stock is assigned early (business day prior to the June 18th ex-dividend date); OR 

• +1.7% absolute return (equivalent to +33.7% annualized return over the next 19 days) if the stock is assigned on the June 26th options expiration date.

Taiwan Semiconductor Manufacturing Co. Ltd.(AIG) -- New Covered Calls Position
The transactions are:

06/08/2020 Bought 300 Taiwan Semiconductor shares @ $54.96
06/08/2020 Sold 3 TSM 6/26/2020 $53.00 Call options @ $2.46
Note: a simultaneous buy/write transaction was executed.  The Implied Volatility was 24.7 when this position was transacted.
06/18/2020 Upcoming quarterly ex-dividend of $.4205 per share

Two possible overall performance results (including commissions) for this Taiwan Semiconductor Covered Calls position are as follows:
Covered Calls Cost Basis: $15,752.02
= ($54.96 - $2.46) * 300 shares + $2.02 commission

Net Profit Components:
(a) Options Income: +$738.00
= ($2.46 * 300 shares)
(b) Dividend Income (If option exercised early on June 17th, the business day prior to the June 18th ex-div date): +$0.00; or
(b) Dividend Income (If TSM stock assigned at June 26th, 2020 options expiration): +$126.15
= ($.4205 dividend per share x 300 shares)

(c) Capital Appreciation (If TSM Call options assigned early on June 17th): -$588.00
+($53.00 - $54.96) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $53.00 strike price at options expiration): -$588.00
+($53.00 - $54.96) * 300 shares

1. Total Net Profit [If option exercised on June 17th (business day prior to the June 18th ex-dividend date)]: +$150.00

= (+$738.00 options income +$0.00 dividend income -$588.00 capital appreciation); or

2. Total Net Profit (If TSM shares assigned at $53.00 at June 26th, 2020 expiration): +$276.15

= (+$738.00 +$126.15 -$588.00)

1. Absolute Return [If option exercised on June 17th (business day prior to ex-dividend date)]: +1.0%

= +$150.00/$15,752.02

Annualized Return (If option exercised early): +34.8%

= (+$150.00/$15,752.02)*(365/10 days); or

2. Absolute Return (If TSM shares assigned at $53.00 at June 26th, 2020 options expiration): +1.8%

= +$275.13/$15,752.02

Annualized Return (If TSM shares assigned at $53.00 at June 19th, 2020 expiration): +33.7%

= (+$276.15/$15,752.02)*(365/19 days)

Either outcome provides an attractive annualized return-on-investment result for this Taiwan Semiconductor investment.  These returns will be achieved as long as the stock is above the $53.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $52.0795 ($54.96 -$2.46 -$.4205) provides 5.2% downside protection below today's stock purchase price.

There is a 71.6% probability that the Calls will be above the $53.00 strike price at options expiration and thus the maximum potential profit would be achieved.

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position and as shown below, eight criteria are met with this position.
Note: there has been a modification to Criteria #3 below.  Previously, the "Annual Dividend Yield (at the Strike Price) metric was > 1.5%.  This criteria is now adjusted relative to the total days until expiration, so it now reads the "Equivalent Annualized Dividend Yield (at the strike price) exceeds 6.0%.  For this TSM position, the Equivalent Annualized Dividend Yield of 16.1% [calculated as ($.4205/$53.00) x (365/18 days)] exceeds the minimum 6.0% criteria in this case.