Covered Calls Established in American International Group Inc. Using the Dividend Capture Strategy

Today a Covered Calls position was established in American International Group Inc. (ticker symbol AIG) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $28.81 and three September 25th, 2020 Call options were sold at $1.35 at the $28.00 strike price.

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a $.32 per share ex-dividend on September 16th is prior to the September 25th options expiration date.  Importantly to the Covered Calls Advisor's analysis, all nine criteria of the Dividend Capture Strategy (see table at end of this post) are met with this position.  The Covered Calls Advisor's current Overall Market Meter outlook remains cautious, so the appropriate Covered Calls strategy is to sell in-the-money strike prices.  Even if the stock market declines during the next two weeks, hopefully the decline will be a moderate one and the stock price of American International Group will not decline below its $28.00 strike price at closing on the Sept 25th options expiration date, in which case the maximum potential profit in this AIG position would be achieved.   

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

•  +2.0% absolute return (equivalent to +119.6% annualized return for the next 6 days) if the stock is assigned early (business day prior to the September 16th ex-dividend date); OR 

• +3.1% absolute return (equivalent to +71.4% annualized return over the next 16 days) if the stock is assigned on the Sept 25th options expiration date.

American International Group Inc. (AIG) -- New Covered Calls Position
The buy/write transaction was:

09/10/2020 Bought 300 American International Group shares @ $28.81 per share
09/10/2020 Sold 3 AIG 9/25/2020 $28.00 Call options @ $1.35
Note: The Implied Volatility of the Call options was 36.7 when this position was transacted.
09/16/2020 Upcoming quarterly ex-dividend of $.32 per share
Note: the annual dividend yield at the purchase price is 4.4%.

Two possible overall performance results (including commissions) for this American International Group Covered Calls position are as follows:
Covered Calls Cost Basis: $8,240.01
= ($28.81 - $1.35) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$405.00
= ($1.35 * 300 shares)
(b) Dividend Income (If option exercised early on Sept 15th, the business day prior to the Sept 16th ex-div date): +$0.00; or
(b) Dividend Income (If AIG stock assigned at Sept 25th, 2020 options expiration): +$96.00
= ($.32 dividend per share x 300 shares)

(c) Capital Appreciation (If AIG Call options assigned early on Sept 15th): -$243.00
= +($28.00 - $28.81) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $28.00 strike price at options expiration): -$243.00
= +($28.00 - $28.81) * 300 shares

1. Total Net Profit [If option exercised on Sept 15th (business day prior to the ex-dividend date)]: +$162.00

= (+$405.00 options income +$0.00 dividend income -$243.00 capital appreciation); or

2. Total Net Profit (If AIG shares assigned at $28.00 strike price at Sept 25th, 2020 expiration): +$258.00

= (+$405.00 +$96.00 -$243.00)

1. Absolute Return (If option exercised on Sept 15th): +2.0%

= +$162.00/$8,240.01

Annualized Return (If option exercised early): +119.6%

= (+$162.00/$8,240.01)*(365/6 days); or

2. Absolute Return (If AIG shares assigned at $28.00 at Sept 25th, 2020 options expiration): +3.1%

= +$258.00/$8,240.01

Annualized Return (If AIG shares assigned at $28.00 at Sept 25th, 2020 expiration): +71.4%

= (+$258.00/$8,240.01)*(365/16 days)

Either outcome provides a very attractive return-on-investment result for this AIG investment.  These returns will be achieved as long as the stock is above the $28.00 strike price at assignment.  There is a 63.6% probability that the Calls will be above the $28.00 strike price at options expiration and thus the maximum potential profit would be achieved. However, if the stock declines below the strike price, the breakeven price of $27.14 ($28.81 -$1.35 -$.32) provides 5.8% 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 American International Group position, all nine criteria are met.