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.