Early this afternoon, a buy/write limit order in General Dynamics Corp. (ticker GD) was executed at the Covered Calls Advisors' net debit price of $133.10 per share. One hundred shares were purchased at $138.16 and one October 16th, 2020 Call option was sold for $5.06 at the $135.00 strike price, therefore a time value of $1.90 = [$5.06 option premium - ($138.16 stock price - $135.00 strike price)] per share.
This position uses the Covered Calls Advisor's Dividend Capture Strategy. General Dynamics has an upcoming quarterly ex-dividend of $1.10 per share on October 8th which is prior to the October 16th options expiration. This is equivalent to an absolute annualized dividend yield of 3.2% (at the current $138.16 stock price) and an equivalent annualized dividend yield of 18.2% = [($1.10/$138.16) x (365/16 days to expiration)]. This dividend is included in the detailed return-on-investment calculations below. Either an early assignment on the day prior to the ex-dividend date or on the October 16th expiration date would be desirable to the Covered Calls Advisor given the high annualized return-on-investment upon assignment for either outcome.
General Dynamics is one of the top five leading defense contractors. Seventy-five percent of its revenue is defense and twenty-five percent is its leading position in business jets via its Gulfstream brand. The defense divisions include a duopoly position in shipbuilding and marine systems (23%), tanks and submarines (18%), DoD information systems (22%), and mission-critical command and control systems (12%). Defense is a low growth business, but General Dynamics is expected to have slightly higher revenues and earnings-per-share next year (2021) than they did in 2019. Compared to averages of four other primary DoD contractors (Lockheed Martin, Raytheon, Northrop Grumman, and L3 Harris), General Dynamics rates better on the fundamental financial metrics of Price-to-Estimated-Fiscal-Year-Forward-Earnings (11.7 vs. 14.2) and Price-to-Sales (1.1 vs. 1.7). Finally, 21 analysts' average rating is Outperform and their current average one-year target price is $172.26 which is a 24.7% increase above the current price.
Important 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.
As detailed below, two potential return-on-investment results are:
- +1.4% absolute return (equivalent to +65.1% annualized return for the next 8 days) if the stock is assigned early (business day prior to the October 8th ex-dividend date); OR
- +2.3% absolute return (equivalent to +51.4% annualized return over the next 16 days) if the stock is assigned on the October 16th options expiration date.
The buy/write transaction was:
09/29/2020 Bought 100 General Dynamics Corp. shares @ $138.16
09/29/2020 Sold 1 GD 10/16/2020 $135.00 Call option @ $5.06
Note: Implied Volatility of the Call options was 27.1 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 64.8.
10/08/2020 Upcoming quarterly ex-dividend of $1.10 per share
Two possible overall performance results (including commissions) for this General Dynamics Covered Call position are as follows:
Covered Calls Cost Basis: $13,310.67
= ($138.16 - $5.06) * 100 shares + $.67 commission
Net Profit Components:
(a) Options Income: +$506.00
= ($5.06 * 100 shares)
(b) Dividend Income (If option exercised early on October 7th, the business day prior to the October 8th ex-div date): +$0.00; or
(b) Dividend Income (If GD stock assigned at October 16th, 2020 options expiration): +$110.00
= ($1.10 dividend per share x 100 shares)
+($135.00 - $138.16) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $135.00 strike price at options expiration): -$316.00
+($135.00 - $138.16) * 100 shares
Either outcome provides a very attractive return-on-investment result for this General Dynamics investment. These returns will be achieved as long as the stock is above the $135.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $132.00 ($138.16 -$5.06 -$1.10) provides 4.5% 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 (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy. All nine criteria are achieved for this General Dynamics Covered Call position.
