Early Assignment of IBM Corp. Covered Calls

Early this morning, the Covered Calls Advisor received email and text notifications from my broker (Schwab) that the two IBM Corp.(ticker symbol IBM) Call options were exercised early, so the 200 shares of IBM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $120.00 strike price. 

Details of the transactions and the results for this IBM position are provided below.  When this Covered Calls position was established, the time value (i.e. extrinsic value) was $1.00 per share = [$6.43 Call options premium - ($125.43 stock price - $120.00 strike price)].  By yesterday's market close (the last business day prior to the August 7th, 2020 ex-dividend date), the stock price has increased from $125.43 when the position was originally established (on July 28th) to $126.12 at yesterday's market close and the time value had declined to about $.17 = [$6.29 options premium at halfway between $5.95/$6.40 bid/ask midpoint and the ask price - ($126.12 stock price - $120.00 strike price)].  So, the Call options owner chose to immediately forgo (i.e.lose) the $.17 remaining time value and closed out their Calls by exercising their option to purchase the stock at the $120.00 strike price and therefore also capture the $1.63 ex-dividend.  On the other side of the transaction, the Covered Calls Advisor benefits because the Calls expire worthless, so the maximum potential $1.00 options income profit per share was achieved. 

The Covered Calls Advisor is pleased with this outcome.  The reason early assignment is preferred is that the Covered Calls Advisor's Dividend Capture Strategy spreadsheet was designed to identify positions where the annualized-return-on-investment (aroi) from early assignment is greater than what might be achieved if the stock is instead assigned at the options expiration date.  For this IBM position, as detailed below, the early assignment of this IBM position provided a +0.8% absolute return (equivalent to +30.7% annualized roi for the 10 days this position was held).  This +30.7% achieved exceeds the +25.2% that might have been achieved if the position would have been in-the-money on the August 28th options expiration date, and therefore was instead assigned later this month. 

IBM Corp. (IBM) -- Covered Calls Position Closed by Early Assignment
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
08/5/2020 Early exercise of 2 IBM August 28th, 2020 $120.00 Call options, so 200 IBM shares were assigned (i.e. sold) at the $120.00 strike price.

The overall performance result (including commissions) for this IBM Covered Calls position was 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 (Call options exercised early on Aug 6th, the business day prior to the Aug 7th ex-div date): +$0.00

(c) Capital Appreciation (Call options assigned early on Aug 6th): -$1,086.00
+($120.00 - $125.43) * 200 shares

 Total Net Profit: +$200.00

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

 Absolute Return: +0.8%

= +$200.00/$23,801.34

Annualized Return: +30.7%

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