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 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
+($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.
