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.