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.