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.