Established Covered Calls Position in Phillips 66 Using the Dividend Capture Strategy

Today a Covered Calls position was established in Phillips 66 (ticker symbol PSX) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $64.39 and 2 August 21st, 2020 Call options were sold at $2.47 at the $62.50 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 69.6, which closely approximates the probability that the Call options will be in-the-money on the options expiration date.  There is an upcoming ex-dividend of $.90 per share next Monday (August 17th) which provides an annual dividend yield of 5.6% at the current stock price of $64.39.  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 21st options expiration date.  Earnings for the 2nd quarter were announced two weeks ago, so there is no intervening earnings report prior to the options expiration date.

An interesting aspect whenever there is a Monday ex-dividend date is that it could be beneficial for us Call sellers.  The Call owners must make their exercise decision by the business day prior to the ex-dividend date which in this instance is in only three days (this Friday, August 14th).  So although there are 5 calendar days until Monday's ex-dividend date, there are only three trading days (including today) for Call owners to make their options exercise decision.   

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

•  +0.9% absolute return (equivalent to +68.4% annualized return-on-investment for the next 5 days) if the stock is assigned early (this Friday which is the last business day prior to the August 17th ex-dividend date); OR 

• +2.4% absolute return (equivalent to +87.2% annualized return over the next 10 days) if the stock is assigned on the August 21st options expiration date.

Phillips 66 (PSX) -- New Covered Calls Position

The buy/write transaction was:
08/12/2020 Bought 300 Phillips 66 shares @ $64.39
08/12/2020 Sold 3 Phillips 66 8/21/2020 $62.50 Call options @ $2.47
Note: the Time Value (aka Extrinsic Value) in the Call options was $.58 per share = [$2.47 Call options premium - ($64.39 stock price - $62.50 strike price)]
08/17/2020 Upcoming quarterly ex-dividend of $.90 per share

Two possible overall performance results (including commissions) for this Phillips 66 Covered Calls position are as follows:
Covered Calls Cost Basis: $18,578.01
= ($64.39 - $2.47) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$741.00
= ($2.47 * 300 shares)
(b) Dividend Income (If option exercised early on Aug 14th, the business day prior to the Aug 17th ex-div date): +$0.00; or
(b) Dividend Income (If PSX stock assigned at August 21st, 2020 expiration): +$270.00
= ($.90 dividend per share x 300 shares)

(c) Capital Appreciation (If PSX Call options assigned early on Aug 14th): -$567.00
+($62.50 - $64.39) * 300 shares; or
(c) Capital Appreciation (If PSX shares assigned at $62.50 strike price at options expiration): -$567.00
+($62.50 - $64.39) * 300 shares

1. Total Net Profit [If option exercised on Aug 14th (business day prior to Aug 17th ex-dividend date)]: +$174.00

= (+$741.00 options income +$0.00 dividend income -$567.00 capital appreciation); or

2. Total Net Profit (If Phillips 66 shares assigned at $62.50 strike price at August 21st, 2020 expiration): +$444.00

= (+$741.00 +$270.00 -$567.00)

1. Absolute Return (If three Phillips 66 Call options exercised early on Aug 14th): +0.9%

= +$174.00/$18,578.01

Annualized Return (If option exercised early): +68.4%

= (+$174.00/$18,578.01)*(365/5 days); or

2. Absolute Return (If Phillips 66 shares assigned at $62.50 at Aug 21st, 2020 options expiration): +2.4%

= +$444.00/$18,578.01

Annualized Return (If PSX shares assigned at $62.50 at Aug 21st, 2020 expiration): +87.2%

= (+$444.00/$18,578.01)*(365/10 days)

Investing in anything in the Energy sector is risky now, but I decided that the high potential returns justified this investment -- in other words, high risk, but high potential reward.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $61.02 ($64.39 -$2.47 -$.90) provides 5.2% 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 must be 'YES' prior to establishing a position.  As shown below with this Phillips 66 position, only seven of the nine criteria were met, but because both of the annualized returns shown in criteria #8 below are outstanding, this Covered Calls buy/write transaction was executed.