Established Covered Calls Position in Devon Energy Corp. Using the Dividend Capture Strategy

Today a Covered Calls position was established in Devon Energy Corp. (ticker symbol DVN) when the Covered Calls Advisor's buy/write limit order was executed -- 600 shares were purchased at $10.44 and 6 September 18th, 2020 Call options were sold at $.89 at the $9.74 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 65.7, which closely approximates the probability that the Call options will be in-the-money on the options expiration date. In addition, there is an upcoming ex-dividend of $.11 per share on September 11th which provides an annual dividend yield of 4.2% at the current stock price of $10.44.  Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the September 18th options expiration date.

Devon Energy has a strong balance sheet and has no major debt maturities in the next five years.  At its current stock price it is undervalued relative to its Energy sector Exploration and Production (E&P) peers.  According to Reuters, the average rating of 29 analysts covering Devon is 'Buy' and their average one-year target price is $16.32 (+56.3% above the current stock price).  

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

•  +2.0% absolute return (equivalent to +103.7% annualized return-on-investment for the next 7 days) if the stock is assigned early (business day prior to the September 11th ex-dividend date); OR 

• +3.1% absolute return (equivalent to +76.4% annualized return over the next 15 days) if the stock is assigned on the September 18th options expiration date.  The Covered Calls Advisor noticed that although there are two weeks until this expiration date, there are only 9 trading days.
  

Devon Energy Corp. (DVN) -- New Covered Calls Position
The buy/write transaction was:
09/04/2020 Bought 600 Devon Energy Corp. shares @ $10.44
09/04/2020 Sold 6 DVN 9/18/2020 $9.74 Call options @ $.89
Note 1: the Implied Volatility of the Calls was 55.9 when this transaction executed.
Note 2: the Time Value (aka Extrinsic Value) in the Call options was $.19 per share = [$.89 Call options premium - ($10.44 stock price - $9.74 strike price)]
09/11/2020 Upcoming quarterly ex-dividend of $.11 per share

Two possible overall performance results (including commissions) for this Devon Energy Covered Calls position are as follows:
Covered Calls Cost Basis: $5,734.02
= ($10.44 - $.89) * 600 shares + $4.02 commission

Net Profit Components:
(a) Options Income: +$534.00
= ($.89 * 600 shares)
(b) Dividend Income (If option exercised early on Sept 10th, the business day prior to the Sept 11th ex-div date): +$0.00; or
(b) Dividend Income (If Devon Energy stock assigned at Sept 18th, 2020 expiration): +$66.00
= ($.11 dividend per share x 600 shares)

(c) Capital Appreciation (If Devon Energy Corp. Call options assigned early on Sept 10th): -$420.00
+($9.74 - $10.44) * 600 shares; or
(c) Capital Appreciation (If DVN shares assigned at $9.74 strike price at options expiration): -$420.00
+($9.74 - $10.44) * 600 shares

1. Total Net Profit [If option exercised on Sept 10th (business day prior to Sept 11th ex-dividend date)]: +$114.00

= (+$534.00 options income +$0.00 dividend income -$420.00 capital appreciation); or

2. Total Net Profit (If Devon Energy shares assigned at $9.74 strike price at September 18th, 2020 expiration): +$180.00

= (+$534.00 +$66.00 -$420.00)

1. Absolute Return (If six DVN Call options exercised early on Sept 10th): +2.0%

= +$114.00/$5,734.02

Annualized Return (If options assigned early): +103.7%

= (+$114.00/$5,734.02)*(365/7 days); or

2. Absolute Return (If Devon Energy shares assigned at $9.74 at Sept 18th, 2020 options expiration): +3.1%

= +$180.00/$5,734.02

Annualized Return (If DVN shares assigned at $9.74 at Sept 18th, 2020 expiration): +76.4%
= (+$180.00/$5,734.02)*(365/15 days)

Either outcome provides a very attractive return-on-investment result for this Devon Energy Corp. investment.  These returns will be achieved as long as the stock is above the $9.74 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $9.44 ($10.44 -$.89 -$.11) provides 9.6% 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 Devon Energy Corp. position, eight of nine criteria were met.