New Cash-Secured Puts Position Established in Cigna Corp.

A new position was established in Cigna Corp. (ticker CI) by selling two August 21st, 2020 100% Cash-Secured Put options at the $162.50 strike price at $2.54 when the price of Cigna stock was at $171.77 per share (5.7% above the strike price).  This is a moderately conservative position since the probability of assignment on the options expiration date was 74.4% when this position was established. 

The 36.6 Implied Volatility for these Cigna Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 26.1.   So the $506.66 ($2.54 per share x 200 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options.  Importantly, Cigna reported their 2nd quarter earnings yesterday, so there is no earnings report prior to the August 21st options expiration date.  Their quarterly earnings were 12.8% above analysts' estimates and they issued guidance for 2020 of $18.00 to $18.60 per share -- a P/E ratio of only about 9.4 based on the current $171.77 stock price.  This compares favorably to their prior 5-year average P/E of 13, and Cigna's business mix is much improved since its acquisition of Express Scripts [one of the Top 3 Pharmacy Benefits Managers (PBMs)] in late 2018.  Now, 71% of revenue is obtained from their PBM business and 26% from their Health Insurance business. 

As detailed below, for this new Cigna Cash-Secured Puts position there is potential for a +1.6% absolute return in 22 days (equivalent to a +26.3% annualized return-on-investment).  



Cigna Corp. (CI) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
07/31/2020  Sold 2 Cigna August 21st, 2020 $162.50 100% Cash-Secured Put options @ $2.54 per share.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the two Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $31,993.34
= ($162.50 - $2.54) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$506.66
= ($2.54 *200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Cigna is above $162.50 strike price at the August 21st expiration): +$0.00
= ($162.50 - $162.50) *200 shares

Total Net Profit (If Cigna stock price is above $162.50 strike price at options expiration): +$506.66
= (+$506.66 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Cigna stock price is above $162.50 strike price at the Aug 21st options expiration) : +1.6%
= +$506.66/$31,993.34
Annualized Return: +26.3%
= (+$506.66/$31,993.34)*(365/22 days)

The downside 'breakeven price' at expiration is at $159.96 ($162.50 - $2.54), which is 6.9% below the current market price of $171.77.

Early Assignment of Citigroup Inc. Covered Calls

When this Citigroup Covered Calls position was established yesterday (link to yesterday's post is here), the Covered Calls Advisor said "In the unlikely event that the owner of these Call options exercises their option before market close today, the Covered Calls Advisor would make a $93.32 profit [($.24 time value per share x 400 shares) - $2.68 commission] in one day."  Surprisingly, the Citigroup stock price increased from $50.20 yesterday morning to $50.87 at yesterday's market close, so the initial time value of $.24 per share [$1.94 Call options premium - ($50.20 stock price - $48.50 strike price] when the position was established declined to close to $0.00 at the end of trading yesterday.  So, the owner of the Calls exercised their Call options to buy the stock and capture today's $.51 ex-dividend and the Covered Calls Advisor made the $93.32 profit in a single day.

The details of this transaction are shown below in the same format as is normally used to show the transactions and financial results from Covered Calls positions when they are closed out.


Citigroup Inc.(C) -- Covered Calls Position Closed by Early Assignment
The transactions were as follows:
07/30/2020 Bought 400 shares of Citigroup @ $50.20 per share 
07/30/2020 Sold 4 Citigroup August 7th, 2020 $48.50 Call options @ $1.94 per share
Note: the Implied Volatility of the Call option was 27.7
07/31/2020 Early exercise of 4 Citi August 7th, 2020 $48.50 Call options, so 400 Citigroup shares were assigned (i.e. sold) at the $48.50 strike price.

The financial performance result (including commissions) was as follows:
Covered Calls Cost Basis: $19,306.68
= ($50.20 - $1.94) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$776.00
= ($1.94 * 400 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$680.00
= ($48.50 -$50.20) * 400 shares

Total Net Profit: +$93.32
= (+$776.00 options income +$0.00 dividend income -$680.00 capital appreciation) - $2.68 commission

Absolute Return: +0.48%
= +$93.32/$19,306.68
Equivalent Annualized Return: +176.4%
= (+$93.32/$19,306.68)*(365/1 day)

Covered Calls Position Established in Citigroup Inc.

With the funds available from the early assignment of Morgan Stanley, a new short-term Covered Calls position was established in another bank, Citigroup Inc. (ticker C), with an August 7th, 2020 options expiration date.  Four hundred shares of Citigroup Inc. were purchased at $50.20 and four Call options were sold at $1.94 per share at the $48.50 strike price. Given the Covered Calls Advisor's Bearish overall market outlook, a moderately in-the-money strike price was selected with a Delta (a good approximation of the probability of assignment at expiration) of 77.1.  Importantly, there is no intervening earnings prior to the options expiration date as Citi's 2nd quarter earnings were reported on July 14th.

There is an ex-dividend date tomorrow (7/31) of $.51 per share, so capturing this dividend is included in the potential return-on-investment results detailed below.  The time value obtained when this position was established was $.24 per share [$1.94 - ($50.20 stock price - $48.50 strike price].  In the unlikely event that the owner of these Call options exercises their option before market close today, the Covered Calls Advisor would make a $93.32 profit [($.24 x 400 shares) - $2.68 commission] in one day.      

A potential return-on-investment result if this position closes in-the-money at the August 7th options expiration date is +1.6% absolute return in 9 days (equivalent to a +63.0% annualized return-on-investment).  

Citigroup Inc.(C) -- New Covered Calls Position
The transactions were as follows:
07/30/2020 Bought 400 shares of Citigroup @ $50.20 per share 
07/30/2020 Sold 4 Citigroup August 7th, 2020 $48.50 Call options @ $1.94 per share
Note: the Implied Volatility of the Call option was 27.7
07/31/2020 Ex-dividend at $.51 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $19,306.68
= ($50.20 - $1.94) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$776.00
= ($1.94 * 400 shares)
(b) Dividend Income: +$204.00
= $.51 per share x 400 shares 
(c) Capital Appreciation (If Citigroup stock is above $48.50 strike price at the Aug 7th options expiration): -$680.00
= ($48.50 -$50.20) * 400 shares

Total Net Profit: +$300.00
= (+$776.00 options income +$204.00 dividend income -$680.00 capital appreciation)

Absolute Return: +1.6%
= +$300.00/$19,306.68
Equivalent Annualized Return: +63.0%
= (+$300.00/$19,306.68)*(365/9 days)

These returns will be achieved if the stock is above the $48.50 strike price at the market closing on the August 7th, 2020 options expiration date.  If the stock declines below the strike price, the breakeven price of $47.75 ($50.20 -$1.94 -$.51) provides 4.9% downside breakeven protection below today's purchase price.

Email me at partlow@cox.net if you have any questions related to Covered Calls investing.

Jeff Partlow

Early Assignment of Morgan Stanley Covered Calls

Surprisingly, the four Morgan Stanley August 7th, 2020 $48.00 Call options were exercised early on the day prior to today's (July 30th) ex-dividend date. The reason this was a surprise to the Covered Calls Advisor was that the owner of these Call options decided to immediately forgo the remaining $.31 time value [$2.55 midpoint value of Call options $2.48/$2.61 Bid/Ask price - ($50.24 current stock price - $48.00 strike price)] in the Calls to buy the stock and therefore also capture today's $.35 ex-dividend. This is a good outcome for the Covered Calls Advisor since the resulting +35.0% annualized return-on-investment (aroi) achieved is better than the +32.1% maximum possible aroi that might have been achieved later at the options expiration date if the stock was above the $48.00 strike price on the expiration date.  As detailed below, a net profit of $128.00 was achieved in one week since the full $1,136 income (profit) received from selling the options exceeded the $1,008 loss in the stock price.

For any Covered Calls position where there is an ex-dividend date prior to the options expiration date, the Covered Calls Advisor usually prefers to have the stock called away (assigned) early, normally the day prior to the ex-div date.  The reason is that the Covered Calls Advisor's Dividend Capture Strategy spreadsheet was designed to identify positions where the aroi from early assignment is greater than what might be achieved if the stock is instead assigned at the options expiration date -- see item #8 below:

Morgan Stanley (MS) -- Covered Calls Position Closed by Early Assignment
The buy/write transaction was:
07/23/2020 Bought 400 Morgan Stanley shares @ $50.52
07/23/2020 Sold 4 Morgan Stanley 8/07/2020 $48.00 Call options @ $2.84
07/29/2020 Early exercise of 4 MS August 7th, 2020 $48.00 Call options, so 400 MS shares were assigned (i.e. sold) at the $48.00 strike price.

The overall performance result (including commissions) for this Morgan Stanley Covered Calls position was as follows:
Covered Calls Cost Basis: $19,074.68
= ($50.52 - $2.84) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,136.00
= ($2.84 * 400 shares)
(b) Dividend Income (Call options exercised early on July 29th, the business day prior to the July 30th ex-div date): +$0.00

(c) Capital Appreciation: -$1,008.00
+($48.00 - $50.52) * 400 shares

Total Net Profit: +$128.00

= (+$1,136.00 options income +$0.00 dividend income -$1,008.00 capital appreciation)

Absolute Return: +0.7%

= +$128.00/$19,074.68

Annualized Return: +35.0%

= (+$128.00/$19,074.68)*(365/7 days)

Established Covered Calls Position in Intel Corporation Using the Dividend Capture Strategy

Today a Covered Calls position was established in Intel Corporation (ticker symbol INTC) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $48.01 and 2 August 14th, 2020 Call options were sold at $2.41 at the $46.00 strike price.   Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, a moderately in-the-money Covered Calls position was established -- the Delta was 71.4, which closely approximates the probability that the Call options will be in-the-money on the options expiration date. In addition, there is an upcoming ex-dividend of $.33 per share on August 6th which provides an annual dividend yield of 2.7% at the current stock price of $48.01.  Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the August 14th options expiration date.

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

•  +0.9% absolute return (equivalent to +40.0% annualized return-on-investment for the next 8 days) if the stock is assigned early (business day prior to the August 6th ex-dividend date); OR 

• +1.6% absolute return (equivalent to +34.4% annualized return over the next 17 days) if the stock is assigned on the August 14th options expiration date.

Intel Corp. (IBM) -- New Covered Calls Position

The buy/write transaction was:
07/29/2020 Bought 200 Intel shares @ $48.01
07/29/2020 Sold 2 Intel 8/14/2020 $46.00 Call options @ $2.41
Note: the Time Value (aka Extrinsic Value) in the Call options was $.40 per share = [$2.41 Call options premium - ($48.01 stock price - $46.00 strike price)]
08/06/2020 Upcoming quarterly ex-dividend of $.33 per share

Two possible overall performance results (including commissions) for this Intel Covered Calls position are as follows:
Covered Calls Cost Basis: $9,121.34
= ($48.01 - $2.41) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$482.00
= ($2.41 * 200 shares)
(b) Dividend Income (If option exercised early on Aug 5th, the business day prior to the Aug 6th ex-div date): +$0.00; or
(b) Dividend Income (If Intel stock assigned at August 14th, 2020 expiration): +$66.00
= ($.33 dividend per share x 200 shares)

(c) Capital Appreciation (If Intel Call options assigned early on Aug 5th): -$402.00
+($46.00 - $48.01) * 200 shares; or
(c) Capital Appreciation (If INTC shares assigned at $120.00 strike price at options expiration): -$402.00
+($46.00 - $48.01) * 200 shares

1. Total Net Profit [If option exercised on Aug 5th (business day prior to Aug 6th ex-dividend date)]: +$80.00

= (+$482.00 options income +$0.00 dividend income -$402.00 capital appreciation); or

2. Total Net Profit (If Intel shares assigned at $46.00 strike price at August 14th, 2020 expiration): +$146.00

= (+$482.00 +$66.00 -$402.00)

1. Absolute Return (If two Intel Call options exercised early on Aug 5th): +0.9%

= +$80.00/$9,121.34

Annualized Return (If option exercised early): +40.0%

= (+$80.00/$9,121.34)*(365/8 days); or

2. Absolute Return (If Intel shares assigned at $46.00 at Aug 14th, 2020 options expiration): +1.6%

= +$146.00/$9,121.34

Annualized Return (If Intel shares assigned at $46.00 at Aug 14th, 2020 expiration): +34.4%

= (+$146.00/$9,121.34)*(365/17 days)

Either outcome provides an attractive return-on-investment result for this Intel investment.  These returns will be achieved as long as the stock is above the $46.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $45.27 ($48.01 -$2.41 -$.33) provides 5.7% 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 must be 'YES' prior to establishing a position.  As shown below with this Intel position, all nine criteria were met.

Established Covered Calls Position in IBM Corp. Using the Dividend Capture Strategy

Today a Covered Calls position was established in IBM Corp. (ticker symbol IBM) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $125.43 and 2 August 28th, 2020 Call options were sold at $6.43 at the $120.00 strike price.   Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, a moderately in-the-money Covered Calls position was established -- the Delta was 71.8, which closely approximates the probability that the Call options will be in-the-money on the options expiration date.

This morning, IBM announced their upcoming ex-dividend of $1.63 per share on August 7th which provides a very attractive annual dividend yield of 5.2% at the current stock price of $125.43.  Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the August 28th options expiration date.

IBM reported their 2nd quarter earnings last week and although revenues and earnings were below those of the same quarter last year, they exceeded analysts' estimates.  Importantly, even in this Covid-19 induced recession year they are expected to produce earnings that imply a current year P/E ratio of 11.3 which is below their prior 5-year historic average P/E of 14.6.  The average one-year target price of 19 analysts tracked by Reuters is $133.75, but the Covered Calls Advisor thinks $150 is not an unreasonable expectation.  Also, the Covered Calls Advisor has developed a stock screener for technology companies based on a price-to-growth-flow model and one of the highest rated companies it recently identified is IBM.  

IBM is well positioned to benefit from the substantial future opportunities in hybrid cloud and artificial intelligence and the new tandem CEO (the first technologist CEO in IBM's history) and President (the former Red Hat CEO) leadership team seem capable of returning IBM revenues to a growth trajectory in the next few years.  However, the Covered Calls Advisor does not consider IBM to be a candidate as a long-term holding, but given its generous dividend yield, which is unusual for a technology-related company (most of whom provide relatively small or no dividend yields), it will be evaluated each quarter that it pays a dividend to see if it meets the Covered Calls Advisor's Dividend Capture strategy criteria (as it does this month).  


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

•  +0.8% absolute return (equivalent to +30.7% annualized return-on-investment for the next 10 days) if the stock is assigned early (business day prior to the August 7th ex-dividend date); OR 

• +2.2% absolute return (equivalent to +25.2% annualized return over the next 32 days) if the stock is assigned on the August 28th options expiration date.

IBM Corp. (IBM) -- New Covered Calls Position
The buy/write transaction was:
07/28/2020 Bought 200 IBM shares @ $125.43
07/28/2020 Sold 2 IBM 8/28/2020 $120.00 Call options @ $6.43
Note: the Time Value (aka Extrinsic Value) in the Call options was $1.00 per share = [$6.43 Call options premium - ($125.43 stock price - $120.00 strike price)]
08/07/2020 Upcoming quarterly ex-dividend of $1.63 per share

Two possible overall performance results (including commissions) for this IBM Covered Calls position are as follows:
Covered Calls Cost Basis: $23,801.34
= ($125.43 - $6.43) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,286.00
= ($6.43 * 200 shares)
(b) Dividend Income (If option exercised early on Aug 6th, the business day prior to the Aug 7th ex-div date): +$0.00; or
(b) Dividend Income (If IBM stock assigned at August 28th, 2020 expiration): +$326.00
= ($1.63 dividend per share x 200 shares)

(c) Capital Appreciation (If IBM Call options assigned early on Aug 6th): -$1,086.00
+($120.00 - $125.43) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $120.00 strike price at options expiration): -$1,086.00
+($120.00 - $125.43) * 200 shares

1. Total Net Profit [If option exercised on Aug 6th (business day prior to Aug 7th ex-dividend date)]: +$200.00

= (+$1,286.00 options income +$0.00 dividend income -$1,086.00 capital appreciation); or

2. Total Net Profit (If IBM shares assigned at $120.00 strike price at August 28th, 2020 expiration): +$526.00

= (+$1,286.00 +$326.00 -$1,086.00)

1. Absolute Return (If two IBM Call options exercised early on Aug 6th): +0.8%

= +$200.00/$23,801.34

Annualized Return (If option exercised early): +30.7%

= (+$200.00/$23,801.34)*(365/10 days); or

2. Absolute Return (If IBM shares assigned at $120.00 at Aug 28th, 2020 options expiration): +2.2%

= +$526.00/$23,801.34

Annualized Return (If IBM shares assigned at $120.00 at Aug 28th, 2020 expiration): +25.2%

= (+$526.00/$23,801.34)*(365/32 days)

Either outcome provides an attractive return-on-investment result for this IBM investment.  These returns will be achieved as long as the stock is above the $120.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $117.37 ($125.43 -$6.43 -$1.63) provides 6.4% 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 must be 'YES' prior to establishing a position.  As shown below with this IBM position, all nine criteria were met.

Established Covered Calls in Micron Technology Inc.

A Covered Calls position has been established in Micron Technology Inc. (ticker MU) with an August 7th, 2020 options expiration date. Five Micron Technology Call options were sold at $2.91 at the $48.00 strike price when the stock price was $49.93.  The Delta was 68.6 when this transaction was executed -- a moderately in-the-money position which is consistent with the Covered Calls Advisor's current cautious market outlook.

Micron's 2nd quarter earnings report was 4 weeks ago.  Despite the excellent results, Micron's stock price remains virtually unchanged.  Their future is bright since they are strong in key growth areas of SSDs, Cloud, Smartphones, Graphics/Game, and 5G with their mix of 2/3 DRAM and 1/3 NAND chips.  Their 3-year CEO, Sanjay Mehrotra, is a brilliant chips engineer who has over 70 patents and co-founded SanDisk.  On the earnings conference call, he was confident and visionary in describing Micron's future diversification projects and the company's focus on developing "higher margin" products.  The semiconductor industry is constantly changing and highly competitive.  Micron's commitment to a Research and Development-to-Revenue ratio of 13% will help them achieve their goals of developing new, cutting edge semiconductor chips.  

Also, Micron's finances are strong and they are also very highly rated by analysts.  Reuters indicates that currently 24 analysts have a Buy or Outperform rating, 10 have a Hold, and 1 has a Strong Sell, and their average target price is $64 (28% above the current price).  

As detailed below, the potential return-on-investment result is +2.1% absolute return in 15 days (equivalent to a +50.7% annualized return-on-investment).  

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

The Buy/Write transaction was as follows:
07/24/2020 Bought 500 shares of Micron Technology Inc. stock @ $49.93 per share 
07/24/2020 Sold 5 Micron Aug 7th, 2020 $48.00 Call options @ $2.91 per share
Note 1: The Implied Volatility of the Call options was 44.5.
Note 2: The Open Interest was only 81 contracts, but the bid/ask spread when the position was executed was narrow at only $.05 ($2.90/$2.95). 

A possible overall performance results (including commissions) if the stock price is above the $48.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $23,513.35
= ($49.93 - $2.91) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$1,455.00
= ($2.91 * 500 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Micron stock is above $48.00 strike price at August 7th expiration): -$965.00
= ($48.00 - $49.93) * 300 shares

Total Net Profit: +$490.00
= (+$1,455.00 options income +$0.00 dividend income -$965.00 capital appreciation)

Absolute Return: +2.1%
= +$490.00/$23,513.35
Equivalent Annualized Return: +50.7%
= (+$490.00/$23,513.35)*(365/15 days)

The downside 'breakeven price' at expiration is at $47.02 ($49.93 - $2.91), which is 5.8% below the current market price of $49.93.

New Cash-Secured Puts Position Established in Alphabet Inc.

A new position was established in Alphabet Inc. (ticker GOOGL) by selling one August 21st, 2020 100% Cash-Secured Put option at the $1,370.00 strike price for $20.40 per share.  A limit order was executed during the first half hour of today's trading session when the price of Alphabet stock was $1,489.08 (8.7% above the $1,370.00 strike price).   

Alphabet is a core position for the Covered Calls Advisor, so normally a GOOGL position is established each month.  The Implied Volatility (IV) of 39.2 for these GOOGL Put options was appealing to the Covered Calls Advisor.  This is substantially higher than the current S&P 500 Volatility Index (VIX) of 27.1.  The current higher than normal IV for GOOGL is in part attributable to the uncertainty related to its upcoming earnings report on July 30th.  So, the $20.40 ($20.40 per share x 100 shares - $.67 commission) is a nice premium to receive for selling this out-of-the-money (i.e. strike price below the current stock price) Put option. 

As detailed below for this new Alphabet Cash-Secured Put position, there is potential for a +1.5% absolute return in 29 days (equivalent to a +18.7% annualized return-on-investment).  


Alphabet Inc. (GOOGL) -- New 100% Cash-Secured Put Position

The transaction was as follows:
07/24/2020 Sold 1 GOOGL Aug 21st, 2020 $1,370.00 100% Cash-Secured Put option @ $20.40 per share 
Note: The Put was sold when the stock was trading at $1,489.08 per share.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $137,000.67
= $1,370.00 per share * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$2,040.00
= ($20.40 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alphabet stock is above $1,370.00 strike price at Aug 21st expiration): +$0.00
= ($1,370.00 -$1,370.00) * 100 shares

Potential Total Net Profit (If Alphabet stock price is above $1,370.00 strike price at Aug 21st options expiration): +$2,040.00
= (+$2,040.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +1.5%
= +$2,040.00/$137,000.67
Equivalent Annualized Return: +18.7%
= (+$2,040.00/$137,000.67)*(365/29 days)

Established Covered Calls Position in Morgan Stanley Using the Dividend Capture Strategy

Today a Covered Calls position was established in Morgan Stanley (ticker symbol MS) when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $50.52 and 4 August 7th, 2020 Call options were sold at $2.84 at the $48.00 strike price. 

Morgan Stanley reported their earnings last week and substantially beat analysts' estimates.  Given the current coronavirus crisis, the traditional branch banking companies have substantially more exposure to credit losses than the leading Capital Markets banks like Morgan Stanley and Goldman Sachs, which are less risky investments.  Also, Morgan Stanley is currently attractive on a historic valuation basis since its current price to tangible book value ratio of 0.9 is substantially below its prior 10-year average of 1.3x tangible book and is close to its historic low.

There is an upcoming ex-dividend of $.35 per share (a 2.8% annualized dividend yield) on July 30th.  Two potential return-on-investment results for this position are detailed below (including the possibility of early exercise since the ex-dividend is prior to the August 7th options expiration date).  Given the Covered Calls Advisor's current Overall Market Meter outlook is Bearish, a conservative in-the-money Covered Calls position was established -- the Delta was 78.9, which approximates the probability that the Call options will be in-the-money on the options expiration date. 

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

•  +0.7% absolute return (equivalent to +35.0% annualized return for the next 7 days) if the stock is assigned early (business day prior to the July 30th ex-dividend date); OR 

• +1.4% absolute return (equivalent to +32.1% annualized return over the next 16 days) if the stock is assigned on the August 7th options expiration date.

This Morgan Stanley Covered Calls position is the first with an August options expiration date in the Covered Calls Advisor Portfolio.  We are very early in the earnings reporting season and the Covered Calls Advisor intends to establish additional positions, but will do so gradually.  I will be watching earnings releases closely each day during the next few weeks and will limit establishing new positions primarily to companies that have reported their quarterly earnings and therefore have no intervening earnings report prior to the August options expiration dates.   

Morgan Stanley (MS) -- New Covered Calls Position
The buy/write transaction was:
07/23/2020 Bought 400 Morgan Stanley shares @ $50.52
Note: this stock price was down 0.9% from yesterday's closing price (and the Dow was down about 380 points) this afternoon when this transaction executed.
07/23/2020 Sold 4 Morgan Stanley 8/07/2020 $48.00 Call options @ $2.84
Note 1: the Implied Volatility of the Call options sold was 28.4
Note 2: the Time Value (aka Extrinsic Value) in the Call options was $.32 per share = [$2.84 Call options premium - ($50.52 stock price - $48.00 strike price)]
07/30/2020 Upcoming quarterly ex-dividend of $.35 per share

Two possible overall performance results (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $19,074.68
= ($50.52 - $2.84) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,136.00
= ($2.84 * 400 shares)
(b) Dividend Income (If option exercised early on July 29th, the business day prior to the July 30th ex-div date): +$0.00; or
(b) Dividend Income (If Morgan Stanley stock assigned at August 7th, 2020 expiration): +$140.00
= ($.35 dividend per share x 400 shares)

(c) Capital Appreciation (If Morgan Stanley Call options assigned early on July 29th): -$1,008.00
+($48.00 - $50.52) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $48.00 strike price at options expiration): -$1,008.00
+($48.00 - $50.52) * 400 shares

1. Total Net Profit [If option exercised on July 29th (business day prior to July 30th ex-dividend date)]: +$128.00

= (+$1,136.00 options income +$0.00 dividend income -$1,008.00 capital appreciation); or

2. Total Net Profit (If Morgan Stanley shares assigned at $48.00 strike price at August 7th, 2020 expiration): +$268.00

= (+$1,136.00 +$140.00 -$1,008.00)

1. Absolute Return (If option exercised early on July 29th): +0.7%

= +$128.00/$19,074.68

Annualized Return (If option exercised early): +35.0%

= (+$128.00/$19,074.68)*(365/7 days); or

2. Absolute Return (If Morgan Stanley shares assigned at $48.00 at Aug 7th, 2020 options expiration): +1.4%

= +$268.00/$19,074.68

Annualized Return (If Morgan Stanley shares assigned at $48.00 at Aug 7th, 2020 expiration): +32.1%

= (+$268.00/$19,074.68)*(365/16 days)

Either outcome provides an attractive return-on-investment result for this Morgan Stanley investment.  These returns will be achieved as long as the stock is above the $48.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $47.33 ($50.52 -$2.84 -$.35) provides 6.3% 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 must be 'YES' prior to establishing a position.  As shown below with this Morgan Stanley position, eight criteria were met.

Early Assignment of CVS Health Corp. Covered Calls

Early this morning, the Covered Calls Advisor received email and text notifications from my broker (Schwab) that three CVS Health Corp. (ticker symbol CVS) Call options were exercised early, so the 300 shares of CVS stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $60.00 strike price. 

Details of the transactions and the results for this CVS Health Corp. position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $.90 = [$3.35 options premium - ($62.45 stock price - $60.00 strike price)].  By yesterday's market close (the last business day prior to the July 22nd, 2020 ex-dividend date), the stock price has increased from $62.45 when the position was originally established (on July 8th) to $64.02 at yesterday's market close and the time value had declined to $0.00.  So, the full $.90 options income profit per share potential was achieved upon the early assignment closing of this position.  CVS' $.50 per share ex-dividend date is today, so the owner of the Calls exercised their option yesterday to buy the shares at the $60.00 strike price, so they will receive the $.50 per share dividend payment.

As detailed below, this early assignment provided a return-on-investment (roi) result for the Covered Calls Advisor Portfolio of +1.5% absolute return (equivalent to +39.7% annualized roi for the 14 days this position was held. The Covered Calls Advisor is pleased with this early assignment since the +39.7% annualized roi achieved exceeds the +36.0% that might have been achieved if the position was instead assigned on the July 31st options expiration date. 

CVS Health Corp. (CVS) -- Covered Calls Position Closed by Early Assignment
The buy/write transaction was:

07/08/2020 Bought 300 CVS shares @ $62.45
07/08/2020 Sold 3 CVS 7/31/2020 $60.00 Call options @ $3.35
Note: The Call options Open Interest was 512 contracts.
07/21/2020 Early exercise of 3 CVS July 31st, 2020 $60.00 Call options, so 300 CVS shares were assigned (i.e. sold) at the $60.00 strike price.

The overall performance results (including commissions) for this CVS Health Covered Calls position were as follows:
Covered Calls Cost Basis: $17,732.01
= ($62.45 - $3.35) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,005.00
= ($3.35 * 300 shares)
(b) Dividend Income (Call options exercised early on July 21st, the business day prior to the July 22nd ex-div date): +$0.00

(c) Capital Appreciation: -$735.00
+($60.00 strike price - $62.45 stock purchase price) * 300 shares

Total Net Profit: [Call options exercised on July 21st (business day prior to the July 22nd ex-dividend date)]: +$270.00

= (+$1,005.00 options income +$0.00 dividend income -$735.00 capital appreciation)

Absolute Return: +1.5%

= +$270.00/$17,732.01

Annualized Return: +39.7%

= (+$270.00/$17,732.01)*(365/14 days)

Testing your Covered Calls Knowledge: 
When and why is a Covered Calls position most likely to be assigned early?  Also, briefly describe why this could be a good or bad result for the Covered Calls investor.
Email me at partlow@cox.net with your answer and I will send you an email reply in return.

Best Wishes to All,
Jeff Partlow

Closed Covered Calls Position in Fifth Third Bancorp

At the July17th options expiration last Friday, the Covered Calls position in Fifth Third Bancorp expired with the stock price below the $19.00 strike price. This morning, very soon after the market opened, the 500 shares of Fifth Third Bancorp in the Covered Calls Advisor Portfolio were sold with a market order than executed at $18.67 per share.

As detailed below, the return-on-investment result for this Fifth Third Bancorp Covered Calls position was +2.2% absolute return in 32 days (equivalent to a +24.6% 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 14.8% (from $21.92 purchase price to $18.67 sale price), a net profit was still achieved from this position.

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

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 @ $3.38 per share
06/29/2020 Ex-dividend of $.27 per share
07/17/2020 5 FITB Calls expired out-of-the-money
Note: the price of FITB shares was $18.76 at options expiration on 7/17
07/20/2020 Closed position by selling 500 FITB shares at $18.67

The overall performance result (including commissions) was 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 (Fifth Third Bancorp stock sold at $18.67 per share): -$1,625.00
= ($18.67 -$21.92) * 500 shares

Total Net Profit: +$200.00
= (+$1,690.00 options income +$135.00 dividend income -$1,625.00 capital appreciation)

Absolute Return: +2.2%
= +$200.00/$9,273.35
Equivalent Annualized Return: +24.6%
= (+$200.00/$9,273.35)*(365/32 days)

July 17th, 2020 Options Expiration Results

The Covered Calls Advisor Portfolio had seven positions with July 17th, 2020 options expirations. Six of the positions closed in-the-money and one closed out-of-the-money.  For the six closed positions, the maximum potential return-on-investment results were achieved as follows:

• Alphabet Inc. (GOOGL) -- +1.7% absolute return (equivalent to +25.8% annualized) for the 24 days of this investment  
• Cigna Corp. (CI) -- +1.3% absolute return (equivalent to +51.6% annualized) for the 9 days of this investment
• Deere & Co. (DE) -- +2.7% absolute return (equivalent to +45.6% annualized) for the 22 days of this investment  
• D.R. Horton Inc. (DHI) -- +2.4% absolute return (equivalent to +46.0% annualized) for the 19 days of this investment
• Lincoln National Corp. (LNC) -- +5.2% absolute return (equivalent to +79.8% annualized) for the 24 days of this investment
• Micron Technology Inc. (MU) -- +2.7% absolute return (equivalent to +39.3% annualized) for the 25 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 with Deltas greater than 70.

The Fifth Third Bancorp Covered Calls position at the $19.00 strike price closed slightly out-of-the-money at $18.76 at options expiration.  So, the 5 June 17th Call options expired and the 500 FITB shares remain in the Covered Calls Advisor Portfolio.  It is likely that the shares will be sold very soon (probably this Monday) to close out this position.  The FITB dividend was captured and the cash received from selling these shares will likely be used to established another Covered Calls position in a bank stock (such as in C, MS, or CFG) using the Covered Calls Advisor's Dividend Capture Strategy.  As always, transactions in the Covered Calls Advisor Portfolio will be posted on this blog on the same day they occur. 

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

New Cash-Secured Puts Position Established in Cigna Corp.

A new position was established in Cigna Corp. (ticker CI) by selling two July 17th, 2020 100% Cash-Secured Put options at the $165.00 strike price.  A limit order was executed during the last half hour of today's trading session when the price of Cigna stock was $173.29 (5.0% above the $165.00 strike price).   

The Implied Volatility of the Put options was very appealing to the Covered Calls Advisor for these Cigna Calls at 47.6 [almost double the S&P 500 Volatility Index (VIX) of 24.3] when this new Cigna position was established.  So the $414.66 ($2.08 per share x 200 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options.  Importantly, there is no earnings report prior to the July 17th options expiration date; Cigna's next quarterly earnings report is scheduled for July 30th.

Cigna is highly rated by analysts.  Reuters Research indicates that currently 9 analysts have a Buy rating, 12 an Outperform rating, 5 a Hold, and no Underperform or Strong Sell.  Their average one-year target price is $241 which is 39% above the current price.  With the acquisition of Express Scripts [one of the Top 3 Pharmacy Benefits Managers (PBMs)] in late 2018, their business mix is much improved with 71% of revenue obtained from their PBM business and 26% from their Health Insurance business.  Despite Covid-19, this year's earnings are expected to increase by 8.5% which would be only a 9.4 P/E ratio based on its current stock price.  This compares favorably with Cigna's prior 5-year average P/E of 13.   

As detailed below, for this new Cigna Cash-Secured Puts position there is potential for a +1.3% absolute return in 9 days (equivalent to a +51.6% annualized return-on-investment).  
Note: Although there are nine calendar days until next Saturday (the day after the options expiration date), it should be noted that since this position was established near the end of trading today, there are actually only 6 trading days remaining through next Friday's options expiration date


Cigna Corp.(CI) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
07/09/2020  Sold 2 Cigna July 17th, 2020 $165.00 100% Cash-Secured Put options @ $2.08 per share.
Note: the Open Interest of these Put options was 241 contracts.
The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the two Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $32,585.34
= ($165.00 - $2.08) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$414.66
= ($2.08 *200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Cigna is above $165.00 strike price at the July 17th expiration): +$0.00
= ($165.00 - $165.00) *200 shares

Total Net Profit (If Cigna stock price is above $165.00 strike price at options expiration): +$414.66
= (+$414.66 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Cigna stock price is above $165.00 strike price at July 17th options expiration) : +1.3%
= +$414.66/$32,585.34
Annualized Return: +51.6%
= (+$414.66/$32,585.34)*(365/9 days)

The downside 'breakeven price' at expiration is at $162.92 ($165.00 - $2.08), which is 6.0% below the current market price of $173.29.

The probability of making a profit (if held until the July 17th, 2020 options expiration) for this Cigna Corp. short Puts position was 76.2% when this position was established.  The potential annualized return on investment of +51.6% is a very attractive risk/reward profile for this conservative Cash-Secured Puts investment.  

Established Covered Calls Position in CVS Health Corp.

Today a Covered Calls position was established in CVS Health Corp. (ticker symbol CVS) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $62.45 and three July 31st, 2020 Call options were sold at $3.35 at the $60.00 strike price, therefore a net debit price of $59.10 which is a time value of $.90 per share [$3.35 options price - ($62.45 stock price - $60.00 strike price)].  This is a moderately in-the-money position since it was established at a price 4.1% above the $60.00 strike price.  The Delta was 69.8 when this Covered Calls position was established -- which approximates the probability that the Call options will be in-the-money on the options expiration date. 

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a quarterly $.50 per share dividend that was announced by CVS this morning goes ex-dividend on July 22nd, which is prior to the July 31st options expiration date.  The stock would have to move up in price by the day prior to the July 22nd ex-div date and by an amount that would cause the time value remaining in the option to decline from its $.90 value today to about $.15 or less.  If this occurs, the owner of the Call options might exercise their right to  purchase the stock at the $60.00 strike price, in which case the options would immediately expire worthless but the owner of the Calls would then own the stock and would capture the dividend.  This outcome would be a desirable one for the Covered Calls Advisor since (as shown in the detailed calculations below) the +39.7% annualized return-on-investment (aroi) is greater than the +36.0% aroi that would be achieved if the Covered Calls position were instead assigned on the options expiration date.  On the other hand, if the stock is not assigned early (on the day prior to the July 22nd ex-div date), but if the stock remains above the $60.00 strike price on the options expiration date, the position would be assigned then and the maximum potential profit at expiration of +36.0% aroi would be achieved.  Another positive feature of this position is that the next quarterly earnings report on August 5th is after the July 31st options expiration date.
  
CVS is rated, on average, as a Moderate Buy by 27 analysts.  Reuters Research indicates that currently 8 analysts have a Buy rating, 10 an Outperform, 9 have a Hold, and none have either Underperform or Strong Sell ratings; and their average target price is $79.18 (26.8% above today's purchase price).  Despite the coronavirus, CVS is expected to achieve record revenues in 2020.  Importantly, most of their fundamental valuation ratio metrics (such as price-to-cash-flow and price-to-sales) are currently more attractive than their prior 5-year average.  On the down side, CVS added substantial long-term debt to its Balance Sheet when it acquired Aetna in November 2018 and its current return on equity (roe) of 11.1% is lower than its average for the past several years; but the encouraging news is that there remains room for improvement given the potential synergies planned by CVS management as they continue to assimilate Aetna operations into CVS. 

The Covered Calls Advisor views CVS as a uniquely positioned 3-in-1 health services company.   Its 9,900 retail drugstores contribute 29% of total revenue, pharmacy benefits management (47%), and health insurance (24%).  Only a few competitors have even two of the three business lines that CVS has -- United Healthcare, Cigna (who owns Express Scripts), and Walmart.  It remains to be seen if CVS can achieve envisioned synergies from the Aetna acquisition and therefore achieve its mission of "helping people on their way to better health".   

While 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, CVS stock was down 2.3% at $62.45 today from yesterday's closing price when this Covered Calls buy/write limit order was transacted, and the Covered Calls Advisor was fortunate that the purchase price was very near the $62.43 low price for the day.  Also, the 2-day relative strength index [i.e. RSI(2)] was in oversold territory at a very low 5.4 reading, so the Implied Volatility of 28.8 when the Call options were sold was an attractive options premium to receive.     

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

•  +1.5% absolute return (equivalent to +39.7% annualized return for the next 14 days) if the stock is assigned early (business day prior to the July 22nd ex-dividend date); OR 

• +2.4% absolute return (equivalent to +36.0% annualized return over the next 24 days) if the stock is assigned on the July 31st options expiration date.

CVS Health Corp. (CVS) -- New Covered Calls Position
The buy/write transaction was:

07/08/2020 Bought 300 CVS shares @ $62.45
07/08/2020 Sold 3 CVS 7/31/2020 $60.00 Call options @ $3.35
Note: The Call options Open Interest was 512 contracts.
07/22/2020 Upcoming quarterly ex-dividend of $.50 per share

Two possible overall performance results (including commissions) for this CVS Health Covered Calls position are as follows:
Covered Calls Cost Basis: $17,732.01
= ($62.45 - $3.35) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,005.00
= ($3.35 * 300 shares)
(b) Dividend Income (If option exercised early on July 21st, the business day prior to the July 22nd ex-div date): +$0.00; or
(b) Dividend Income (If CVS stock assigned at July 31st, 2020 options expiration): +$150.00
= ($.50 dividend per share x 300 shares)

(c) Capital Appreciation (If CVS Call options assigned early on July 21st): -$735.00
+($60.00 strike price - $62.45 stock purchase price) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $60.00 strike price at options expiration): -$735.00
+($60.00 - $62.45) * 300 shares

1. Total Net Profit [If option exercised on July 21st (business day prior to the July 22nd ex-dividend date)]: +$270.00

= (+$1,005.00 options income +$0.00 dividend income -$735.00 capital appreciation); or

2. Total Net Profit (If CVS shares assigned at $60.00 at July 31st, 2020 expiration): +$420.00

= (+$1,005.00 options income +$150.00 dividend income -$735.00 capital appreciation)

1. Absolute Return [If option exercised on July 21st (business day prior to ex-dividend date)]: +1.5%

= +$270.00/$17,732.01

Annualized Return (If option exercised early): +39.7%

= (+$270.00/$17,732.01)*(365/14 days); or

2. Absolute Return (If CVS shares assigned at $60.00 at July 31st, 2020 options expiration): +2.4%

= +$420.00/$17,732.01

Annualized Return (If CVS shares assigned at $60.00 at July 31st, 2020 expiration): +36.0%

= (+$420.00/$17,732.01) *(365/24 days)

Either outcome provides a good annualized return-on-investment result -- well above the minimum desired 25.0% aroi for positions with from 20 to 30 days remaining until expiration.  These returns will be achieved as long as the stock is above the $60.00 strike price on the options expiration date.  However, if the stock declines below the strike price, the breakeven price of $58.60 ($62.45 -$3.35 -$.50) provides 6.2% 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 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 CVS position, the Equivalent Annualized Dividend Yield of 12.7% [calculated as ($.50/$60.00) x (365/24 days)] achieves the objective in this case since it exceeds the minimum 6.0% threshold criteria. 

Closed Covered Calls Position in JPMorgan Chase & Co.

Today, the Covered Calls Advisor closed out the existing JPMorgan Chase & Co. (ticker symbol JPM) Covered Calls position. The next quarterly earnings is next Tuesday (which is prior to next Friday's options expiration date) and it was determined that not holding the position on the earnings date was the most prudent decision, so the position was closed out.  This JPM Covered Calls position had 200 shares and two July 17th, 2020 Calls at the $90.00 strike price.  A $.90 ex-dividend on July 2nd was captured and is included in the return-on-investment (roi) results detailed below.  This position demonstrates an occasional advantage of in-the-money Covered Calls positions since despite a stock declined of $3.34 per share, a small positive roi was still achieved.      

The financial result of this JPM Covered Calls position was a +0.7% absolute return-on-investment (equivalent to +17.1% on an annualized basis) for the 14 days this position was held.


JPMorgan Chase & Co. (JPM) -- Covered Calls Position Closed
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 Ex-dividend of $.90 per share
07/8/2020  Exited Covered Calls position by selling 200 shares JPM stock @ $92.47 per share and simultaneously buying-to-close 2 July 17th, 2020 $90.00 Call options at $4.43 per share.




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

Net Profit:
(a) Options Income (Bought-to-Close 2 Call options at $4.43 per share): +$604.00
= ($7.45 - $4.43) *200 shares)

(b) Dividend Income (Ex-dividend of $.90 per share on July 2nd received): +$180.00
= ($.90 dividend per share x 200 shares)

(c) Capital Appreciation (JPM shares sold at $92.47 per share): -$668.00
+($92.47-$95.81) * 200 shares

Total Net Profit: +$116.00

= (+$604.00 options income +$180.00 dividend income -$668.00 capital appreciation)

Absolute Return: +0.7%

= +$116.00/$17,673.34

Annualized Return (If JPM assigned at $90.00 at July, 17th 2020 expiration): +17.1%

= (+$116.00/$17,673.34)*(365/14 days)

July 2nd, 2020 Options Expiration -- SPDR S&P 500 ETF Covered Calls Position Assigned

The July 2nd, 2020 $290.00 Covered Calls position in the SPDR S&P 500 ETF (ticker SPY) expired in-the-money, so the 200 shares of SPY were assigned (i.e. sold) at the $290.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +0.8% absolute return (equivalent to +31.6% annualized return-on-investment for the 9 days holding period).

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

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
07/02/2020 Two SPDR S&P 500 ETF Call options expired in-the-money so 200 SPY shares sold at $290.00 strike price.
Note: the SPY share price closed in-the-money at $312.19.

The overall performance result (including commissions) was 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 (SPY was 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)

Early Assignment of Bristol-Myers Squibb Co. Covered Calls

Before market open this morning, I received email and text notifications from my broker (Schwab) that all five Bristol-Myers Squibb Co. (ticker symbol BMY) Call options were exercised early, so the 500 shares of Bristol-Myers stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $50.00 strike price. 

Details of the transactions and the results for this Bristol-Myers position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $.61 = [$5.46 options premium - ($54.85 stock price - $50.00 strike price)].  By yesterday's market close (the last business day prior to the July 2nd, 2020 ex-dividend date), the time value had declined to $0.42.  So, the full $.61 options income profit per share potential was achieved upon the early assignment closing of this position.  The per share price has increased from $54.85 when the position was originally established (on June 19th) to $58.98 at yesterday's market close.  The owner of the Calls exercised their option to buy the shares at the $50.00 strike price in order to capture the $.45 dividend.  As detailed below, this early assignment provided a return-on-investment (roi) result for the Covered Calls Advisor Portfolio of +1.2% absolute return (equivalent to +34.7% annualized roi for the 13 days this position was held. The Covered Calls Advisor is pleased with this early assignment since the +34.7% annualized roi achieved exceeds the +27.0% that would have been achieved if the position was instead assigned on the July 17th options expiration date. 

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 Bristol-Myers position are provided below.


Bristol-Myers Squibb Co. (BMY) -- Covered Calls Position Assigned Early
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.
07/01/2020 5 Call options exercised so 500 shares of BMY stock assigned (i.e. sold) at the $50.00 strike price

The overall performance result (including commissions) for this Bristol-Myers Covered Calls position was 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 (Call options exercised early on July 1st, the business day prior to the July 2nd ex-div date): +$0.00

(c) Capital Appreciation (BMY Call options assigned early on July 1st): -$2,425.00
+($50.00 - $54.85) * 500 shares

Total Net Profit: +$305.00

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

Absolute Return: +1.2%

= +$305.00/$24,698.35

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

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

The Critically Important Role of "Checklists" for the Covered Calls Investor

The Covered Calls Advisor uses several sources of information and analytical methods to determine whether a particular company qualifies as a worthwhile investment.  But in recent years, this advisor often failed to research the selected companies as fully as desired prior to their purchase.  In other words, shortcuts were taken.  This realization is especially disconcerting since "discipline" is one of the five essential qualities of successful investors, as specified in my recent blog article: "My Investing Pyramid of Success" (see "Link").

So how is this necessary "discipline" applied to ensure that the essential research methods in analyzing a potential stock investment are consistently followed?  The answer came from an unlikely source, a book titled "The Checklist Manifesto" (see "Link").  The author, Dr. Atul Gawande, demonstrates how ordinary checklists have been used to significantly improve complex decision-making processes in diverse disciplines such as medicine, aerospace, and yes, even in investing. The author explains how behavioral researchers have determined that there are two primary difficulties in complex decision-making:
(1) "the fallibility of human memory and attention, especially when it comes to mundane, routine matters that are easily overlooked under the strain of more pressing events"; and (2) "people can lull themselves into skipping steps even when they remember them."

To combat these difficulties, "checklists seem to provide protection against such failures. They remind us of the minimum necessary steps and make them explicit. They not only offer the possibility of verification but also instill a kind of discipline of higher performance." Checklists "catch mental flaws inherent in all of us -- flaws of memory and attention and thoroughness."

As Covered Calls investors, there are both Options and Company criteria to be analyzed before a decision to establish a Covered Calls (or Cash-Secured Puts) position in a particular company is reached.  The research and analysis process for  individual companies is time consuming, but fortunately the analysis of whether or not that company's Options meet the necessary criteria (by using an Options Checklist) is a quick one --it only takes about five minutes.   
So first, using the Options Checklist shown below, we determine if all three necessary Options characteristics are achieved for the particular company we are interested in investigating.       

I. Options Checklist
1. No earnings report prior to the options expiration date -- because of the volatility of stock prices when earnings are reported, we prefer to avoid investing in these companies when there are intervening earnings prior to the options expiration date.
2. Adequate options liquidity -- avoid options with low liquidity.  Generally, a minimum of 150 open interest contracts for the strike prices we are considering is preferred.  This criteria helps to ensure that a low options price bid/ask spread is available, thus minimizing slippage in our options transactions.
3. Options Implied Volatility exceeds the S&P 500 Volatility Index (VIX) -- this ensures that the potential Covered Calls return-on-investment available from the individual stock is greater than that from the S&P 500 Index.

If (and only if) all three of these criteria are successfully met, we can then proceed to the Company Checklist to evaluate whether or not that company's stock might be a worthwhile investment opportunity. 

II. Company Checklist
I used to have a lengthy Company Checklist of more than a dozen items.  But ultimately, I found that it was so cumbersome that I was focusing too much on the details and neglecting the big picture aspects of the company's business and its competitive position.  Through further reading and researching about investing checklists, I discovered the right balance for me between the discipline of a checklist and the simplicity of a shorter, more focused list.  Not surprisingly, this new checklist is the one used by renowned investors Warren Buffett and Charlie Munger.  Please watch and listen to this video where they describe the four items (shown below) on their checklist process: (Link to Buffett & Munger video)           

Company Checklist:
1. Fully understand the company's business
2. Quality: A good business model - has a Sustainable Competitive Advantage
3. Quality Management
4. Value -- a Margin of Safety at the current stock price

Here is the blank Company Checklist form that I currently use:

COMPANY: ____________________________                                                     As of: ___________

Hq: _____________________   Industry: ___________________

I. Options Checklist                   
1. No earnings report prior to the options expiration date.                                          Ex-div?   

2. Adequate options liquidity -- avoid options with low liquidity.  Generally, a minimum of 150 open interest contracts

3. Options Implied Volatility exceeds the S&P 500 Volatility Index (VIX)

II. Company Checklist
1. Fully understand the company's business              Market Cap: ________   Enterprise Value: _________

2. Quality: A good business model - has a Sustainable Competitive Advantage

                        Company   Historic   Sector

    ROE

    Debt/Equity                                     N.A.

3. Quality: Management

            CEO and Vision: 

4. Value: a Margin of Safety at the current stock price

        Current Price: ______   Target Price:  _______   % Change: ______     Reuters: _________________

                            Company   Historic   Sector           Piotroski: ____

              P/CF

              P/BV

              P/S                                                                                                    SUMMARY COMMENTS:

                                                                                                                                   

5. Growth: Future Earnings, Revenue, and P/E Potential   

EPS:  LY ______     Rev:  LY ______                     P/E:  

          TY ______               TY ______           TY    ______

        FYF ______              FYF ______          FYF   ______

                                                                   Historic   ______

Completing these steps on the Company Checklist prior to making a final investment decision is definitely a time-consuming process -- but it's worth it.  We should commit ourselves to read Avidly, Selectively, Carefully, Critically, and Thoughtfully (see Link from a previous blog post) for each of the four items in the Company Checklist.  Remember: Good stock selection is Job #1 for us Covered Calls investors, and an essential quality for successful investing is discipline.  The 4-step Company Checklist above provides a nice, disciplined framework for a consistent analytical approach for identifying companies that are worthwhile investments.

This approach of consistently applying the Options Checklist followed by the Company Checklist provides the discipline necessary to reduce our stock selection mistakes and therefore to improve our overall return-on-investment results.

I hope you will consider applying this Options Checklist and Company Checklist in your own Covered Calls investing process.  As always, email me at partlow@cox.net with your comments or questions regarding anything in this article or anything else related to Covered Calls investing.  I welcome your feedback.

Best Wishes and Godspeed,
Jeff