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 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
+($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.
