There is an upcoming ex-dividend of $1.25 per share (a 2.4% annualized dividend yield) on August 31st. 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 September 4th options expiration date). Given the Covered Calls Advisor's current cautious outlook, an in-the-money Covered Calls position was established -- the Delta was 63.4, which approximates the probability that the Call options will be in-the-money on the options expiration date. Importantly, there is no earnings report prior to the options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.4% absolute return (equivalent to +40.7% annualized return for the next 13 days) if the stock is assigned early (business day prior to the August 31st ex-dividend date); OR
- +2.1% absolute return (equivalent to +42.4% annualized return over the next 18 days) if the stock is assigned on the September 4th options expiration date.
Goldman Sachs Group Inc. (GS) -- New Covered Call Position
08/18/2020 Bought 100 shares of Goldman Sachs stock @ $201.36 per share
08/18/2020 Sold 1 Sept 4th, 2020 $197.50 Call option @ $6.68 per share
Note: The Implied Volatility of the Call option was 24.8.
08/31/2020 Upcoming ex-dividend of $1.25 per share
Two possible overall performance results (including commissions) for this Goldman Sachs Covered Call position are as follows:
Covered Call Cost Basis: $19,468.67
= ($201.36 - $6.68) * 100 shares + $.67 commission
Net Profit Components:
(a) Options Income: +$668.00
= ($6.68 * 100 shares)
(b) Dividend Income (If option exercised early on August 28th, the business day prior to the August 31st ex-div date): +$0.00; or
(b) Dividend Income (If Goldman Sachs stock assigned at Sept 4th, 2020 expiration): +$125.00
= ($1.25 dividend per share x 100 shares)
(c) Capital Appreciation (If Goldman Sachs Call option assigned early on Aug 28th): -$386.00
+($197.50 - $201.36) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $197.50 strike price at options expiration): -$386.00
+($197.50 - $201.36) * 100 shares
+($197.50 - $201.36) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $197.50 strike price at options expiration): -$386.00
+($197.50 - $201.36) * 100 shares
1. Total Net Profit [If option exercised on Aug 28th (business day prior to Aug 31st ex-dividend date)]: +$282.00
= (+$668.00 options income +$0.00 dividend income -$386.00 capital appreciation); or
2. Total Net Profit (If Goldman Sachs shares assigned at $197.50 strike price at Sept 4th, 2020 expiration): +$407.00
= (+$668.00 +$125.00 -$386.00)
1. Absolute Return (If option exercised early on August 28th): +1.4%
= +$282.00/$19,468.67
Annualized Return (If option exercised early): +40.7%
= (+$282.00/$19,468.67)*(365/13 days); or
2. Absolute Return (If Goldman Sachs shares assigned at $197.50 at September 4th, 2020 options expiration): +2.1%
= +$407.00/$19,468.67
Annualized Return (If Goldman Sachs shares assigned at $48.00 at Aug 7th, 2020 expiration): +42.4%
= (+$407.00/$19,468.67)*(365/18 days)
Either outcome provides an attractive return-on-investment result for this Goldman Sachs investment. These returns will be achieved as long as the stock is above the $197.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $193.43 ($201.36 -$6.68 -$1.25) provides 3.9% downside breakeven price 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 Goldman Sachs position, only seven criteria were met, but because both of the annualized returns shown in criteria #8 below are above the desired threshold of +30.0%, this Covered Calls buy/write transaction was executed.
