Lincoln National has an upcoming quarterly ex-dividend of $.40 per share on October 8th which is prior to the October 16th options expiration. This is equivalent to an absolute annualized dividend yield of 5.8% (at the $27.50 strike price) and an equivalent annualized dividend yield of 21.1% = [($.40/$30.05) x (365/23 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 for either outcome.
The Implied Volatility (IV) of these Call options was 52.6 when this buy/write transaction was executed -- a nice IV given that the next earnings report on November 4th is after the October 16th options expiration date. Consequently, this position provides a very attractive potential annualized return-on-investment (aroi) of +60.2% at expiration. This aroi is especially impressive since: (1) Lincoln National is a Fortune 250 mid-cap sized and well-diversified insurance company whose market cap is $5.9 billion; and (2) A relatively conservative in-the-money Covered Calls position was established with a delta (which provides a good approximation of the probability of assignment at expiration) of 73.9%.
Although the 2nd quarter earnings report was disappointing since it missed expected revenue and earnings per share estimates, the stock price has declined accordingly. LNC's current fundamental value is attractive (especially on a price-to-book value ratio), and LNC appears on the Covered Calls Advisor's 'Financial Sector Value Screen'.
Although the Covered Calls Advisor depends primarily on fundamental valuation and competitive position factors in deciding what stocks to purchase, a minor consideration is given to technical factors. In that regard, LNC stock was down another 1.3% today from yesterday's closing price and the 2-day relative strength index [i.e. RSI(2)] is well into short-term oversold territory and declined to a very low 2.2 reading today when this buy/write limit order was executed. Note: below 30 is considered 'oversold' and above 70 is considered 'overbought'.
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 month, hopefully the decline will be a moderate one and the stock price of Lincoln National Corp. will not decline below the $27.50 strike price at closing on the October 16th options expiration date, in which case the maximum potential profit in this LNC position would be achieved.
As detailed below, two potential return-on-investment results are:
- +2.3% absolute return (equivalent to +60.1% annualized return for the next 14 days) if the stock is assigned early (business day prior to the October 8th ex-dividend date); OR
- +3.8% absolute return (equivalent to +60.2% annualized return over the next 23 days) if the stock is assigned on the October 16th options expiration date.
Lincoln National Corp. (LNC) -- New Covered Calls PositionThe buy/write transaction was:
09/24/2020 Bought 300 Lincoln National shares @ $30.05
09/24/2020 Sold 3 LNC 10/16/2020 $27.50 Call options @ $3.17
Note: Implied Volatility of the Call options was 52.6 when this position was transacted.
10/08/2020 Upcoming quarterly ex-dividend of $.40 per share
Two possible overall performance results (including commissions) for this Lincoln National Covered Calls position are as follows:
Covered Calls Cost Basis: $8,066.01
= ($30.05 - $3.17) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$951.00
= ($3.17 * 300 shares)
(b) Dividend Income (If option exercised early on October 7th, the business day prior to the October 9th ex-div date): +$0.00; or
(b) Dividend Income (If LNC stock assigned at October 16th, 2020 options expiration): +$120.00
= ($.40 dividend per share x 300 shares)
(c) Capital Appreciation (If LNC Call options assigned early on Oct. 7th): -$765.00
+($30.05 - $27.50) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $27.50 strike price at options expiration): -$765.00
+($27.50 - $30.05) * 300 shares
+($30.05 - $27.50) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $27.50 strike price at options expiration): -$765.00
+($27.50 - $30.05) * 300 shares
1. Total Net Profit [If option exercised on October 7th (business day prior to the October 8th ex-dividend date)]: +$186.00
= (+$951.00 options income +$0.00 dividend income -$765.00 capital appreciation); or
2. Total Net Profit (If LNC shares assigned at $27.50 at Oct 16th, 2020 expiration): +$306.00
= (+$951.00 +$120.00 -$765.00)
1. Absolute Return [If option exercised on business day prior to ex-dividend date]: +2.3%
= +$186.00/$8,066.01
Annualized Return (If option exercised early): +60.1%
= (+$186.00/$8,066.01)*(365/14 days); or
2. Absolute Return (If LNC shares assigned on Oct. 16th options expiration date): +3.8%
= +$306.00/$8,066.01
Annualized Return (If LNC shares assigned at $27.50 at Oct 16th, 2020 expiration): +60.2%
= (+$306.00/$8,066.01)*(365/23 days)
Either outcome provides a very attractive return-on-investment result for this Lincoln National investment. These returns will be achieved as long as the stock is above the $27.50 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $26.48 ($30.05 -$3.17 -$.40) provides 11.9% 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 in this LNC Covered Calls position.
