Established Covered Calls Positions in Intel Corp. and Pfizer Inc.

Today, Covered Calls positions were established in Intel Corporation (ticker symbol INTC) and Pfizer Inc. (PFE) when the Covered Calls Advisor's buy/write limit orders were executed. For Intel, 200 shares were purchased at $44.64 and 2 November 20th, 2020 Call options were sold at $2.94 at the $42.50 strike price.   For Pfizer, 400 shares were purchased at $36.24 and 4 November 20th, 2020 Call options were sold at $2.79 at the $34.00 strike price.  Given the Covered Calls Advisor's current cautious outlook, moderately in-the-money Covered Calls positions were established for both companies.  Delta was 69.9 for the Intel Covered Calls position and 73.8 for the Pfizer position -- this approximates the probability that the Call options will be in-the-money on the options expiration date. In addition, there are upcoming ex-dividends of $.33 per share for Intel and $.38 for Pfizer, both on November 5th.   Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since these ex-dividends are prior to the November 20th options expiration date.  Also, very important to the Covered Calls Advisor, neither company has a quarterly earnings report prior to the November 20th options expiration date.

As detailed below, two potential return-on-investment results for each of these Covered Calls positions are: 

• For Intel Corp.: +1.9% absolute return (equivalent to +87.5% annualized return-on-investment for the next 8 days) if the stock is assigned early (business day prior to the November 5th ex-dividend date); OR (2) +2.7% absolute return (equivalent to +41.2% annualized return over the next 24 days) if the stock is assigned on the November 20th options expiration date.

• For Pfizer Inc.: +1.6% absolute return (equivalent to +75.0% annualized return-on-investment for the next 8 days) if the stock is assigned early (business day prior to the November 5th ex-dividend date); OR (2) +2.8% absolute return (equivalent to +42.3% annualized return over the next 24 days) if the stock is assigned on the November 20th options expiration date.

1.  Intel Corp. (INTC) -- New Covered Calls Position

The buy/write transaction was:
10/28/2020 Bought 200 Intel shares @ $44.64
10/28/2020 Sold 2 Intel 11/20/2020 $42.50 Call options @ $2.94
Note: the Time Value (aka Extrinsic Value) in the Call options was $.80 per share = [$2.94 Call options premium - ($44.64 stock price - $42.50 strike price)]
11/05/2020 Upcoming quarterly ex-dividend of $.33 per share

Two possible overall performance results (including commissions) for this Intel Covered Calls position are as follows:
Covered Calls Cost Basis: $8,341.34
= ($44.64 - $2.94) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$588.00
= ($2.94 * 200 shares)
(b) Dividend Income (If option exercised early on Nov 4th, the business day prior to the Nov 5th ex-div date): +$0.00; or
(b) Dividend Income (If Intel stock assigned at November 20th, 2020 expiration): +$66.00
= ($.33 dividend per share x 200 shares)

(c) Capital Appreciation (If Intel Call options assigned early on Nov 4th): -$428.00
+($42.50 - $44.64) * 200 shares; or
(c) Capital Appreciation (If INTC shares assigned at $120.00 strike price at options expiration): -$428.00
+($42.50 - $44.64) * 200 shares

1. Total Net Profit [If option exercised on Nov 4th (business day prior to Nov 5th ex-dividend date)]: +$160.00

= (+$588.00 options income +$0.00 dividend income -$428.00 capital appreciation); or

2. Total Net Profit (If Intel shares assigned at $42.50 strike price at November 20th, 2020 expiration): +$226.00

= (+$588.00 +$66.00 -$428.00)

1. Absolute Return (If two Intel Call options exercised early on Nov 4th): +1.9%

= +$160.00/$8,341.34

Annualized Return (If option exercised early): +87.5%

= (+$160.00/$8,341.34)*(365/8 days); or

2. Absolute Return (If Intel shares assigned at $42.50 at Nov 20th, 2020 options expiration): +2.7%

= +$226.00/$8,341.34

Annualized Return (If Intel shares assigned at $42.50 at Nov 20th, 2020 expiration): +41.2%

= (+$226.00/$8,341.34)*(365/24 days)

Either outcome provides an attractive return-on-investment result for this Intel investment.  These returns will be achieved as long as the stock is above the $42.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $41.37 ($44.64 -$2.94 -$.33) provides 7.3% 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 Intel position, all nine criteria were met.

 

2.  Pfizer Inc. (PFE) -- New Covered Calls Position
The buy/write transaction was:
10/28/2020 Bought 400 Pfizer shares @ $36.24
10/28/2020 Sold 4 Pfizer 11/20/2020 $34.00 Call options @ $2.79
Note: the Time Value (aka Extrinsic Value) in the Call options was $.55 per share = [$2.79 Call options premium - ($36.24 stock price - $34.00 strike price)]
11/05/2020 Upcoming quarterly ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this Pfizer Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $13,382.68
= ($36.24 - $2.79) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,116.00
= ($2.79 * 400 shares)
(b) Dividend Income (If option exercised early on Nov 4th, the business day prior to the Nov 5th ex-div date): +$0.00; or
(b) Dividend Income (If Pfizer stock assigned at Nov 20th, 2020 expiration): +$152.00
= ($.38 dividend per share x 400 shares)

(c) Capital Appreciation (If Pfizer Call options assigned early on Nov 4th): -$896.00
+($34.00 - $36.24) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $34.00 strike price at options expiration): -$896.00
+($34.00 - $36.24) * 400 shares

1. Total Net Profit [If option exercised on Nov 4th (business day prior to Nov 5th ex-dividend date)]: +$220.00

= (+$1,116.00 options income +$0.00 dividend income -$896.00 capital appreciation); or

2. Total Net Profit (If Pfizer shares assigned at $34.00 strike price at November 20th, 2020 expiration): +$372.00

= (+$1,116.00 +$152.00 -$896.00)

1. Absolute Return (If option exercised early on Nov 4th): +1.6%

= +$220.00/$13,382.68

Annualized Return (If option exercised early): +75.0%

= (+$220.00/$13,382.68)*(365/8 days); or

2. Absolute Return (If Pfizer shares assigned at $34.00 at Nov 20th, 2020 options expiration): +2.8%

= +$372.00/$13,382.68

Annualized Return (If Pfizer shares assigned at $34.00 at Nov 20, 2020 expiration): +42.3%

= (+$372.00/$13,382.68)*(365/24 days)

Either outcome provides an attractive return-on-investment result for this Pfizer investment.  These returns will be achieved as long as the stock is above the $34.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $33.07 ($36.24 -$2.79 -$.38) provides 8.7% 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 Pfizer position, all nine criteria were met.

Covered Calls Position Established in Citigroup Inc.

Today, a Covered Calls position was established in Citigroup Inc. (ticker symbol C) with the purchase of 300 shares at $42.09 per share and three November 6th, 2020 Call options were sold for $2.34 at the $40.00 strike price.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Bearish, a moderately in-the-money Covered Calls positions was established. 

This position continues the implementation of the Covered Calls Advisor's Dividend Capture Strategy of monthly Covered Calls on money center bank stocks.  Using good timing, as dictated using this advisor's Dividend Capture Strategy worksheet, selling in-the-money monthly Covered Calls for one of the four biggest U.S. money center banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) each month;
(JPMorgan for Jan, Apr, July, and Oct options expirations;
Citigroup and/or Wells Fargo for Feb, May, Aug, and Nov expirations; and
Bank of America for Mar, Jun, Sep, and Dec expirations).

The goal of these monthly Covered Calls in the money center banks is to both capture the quarterly dividend payment and for the stock prices to remain above the strike price at options expiration, therefore achieving the maximum possible return-on-investment result for the position.  So far, this approach has provided higher annualized return results than would be achieved with either: (1) Covered Calls in these same stocks during their non-ex-dividend months; or (2) A simple buy-and-hold stock purchase of these bank stocks.    Hopefully, the outperformance results achieved to-date using this strategy will continue with this November 6th Citigroup Covered Calls position.

Two potential return-on-investment results are: (a) +0.6% absolute return (equivalent to +76.5% annualized return for the next 3 days) if the stock is assigned early [prior to close of business this Thursday which is the last business day prior to Friday's ex-dividend date]; OR (b) +1.9% absolute return (equivalent to +63.4% annualized return over the next 11 days) if the stock is assigned on the November 6th options expiration date. 

These potential return-on-investment results for this position is detailed below and includes the possibility of early exercise by an owner of these Call options.  Fortunately, Citigroup reported their quarterly earnings twelve days ago on October 15th, so the next earnings report is not until mid-January of 2020, well after the options expiration date for this position.

Citigroup Inc. (C) -- New Covered Calls Position
It is unlikely, but if the current time value (i.e. extrinsic value) of $.25 per share = [$2.34 Call options price - ($42.09 stock price - $40.00 strike price)] remaining in the three short Call options decays substantially (down to about $.10 or less) by close of business in two days (this Thursday, which is the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 300 Citigroup shares away to capture the dividend payment.

The transactions were:
10/27/2020 Bought 300 Citigroup shares @ $42.09
10/27/2020 Sold 3 Citigroup 11/06/2020 $40.00 Call options @ $2.34
10/30/2020 Upcoming quarterly ex-dividend of $.51 per share

Two possible overall performance results (including commissions) for this
Citigroup Covered Calls position are as follows:
Covered Calls Cost Basis: $11,927.01
= ($42.09 - $2.34) *300 + $2.01 commission

Net Profit Components:
(a) Options Income: +$702.00
= ($2.34*300 shares)
(b) Dividend Income (If option exercised early on October 29th, the business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If Citi shares assigned at Nov 6th, 2020 expiration): +$153.00
= ($.51 dividend per share x 300 shares)
(c) Capital Appreciation (If Citigroup shares assigned early on October 29th): -$627.00
+($40.00-$42.09)*300 shares; or
(c) Capital Appreciation (If Citi assigned at $40.00 strike price at options expiration): -$627.00
+($40.00-$42.09)*300 shares

1. Total Net Profit [If option exercised on Oct 29th (business day prior to Oct 30th ex-dividend date)]: +$75.00

= (+$702.00 +$0.00 -$627.00); or

2. Total Net Profit (If Citi shares assigned at $40.00 at Nov 6th, 2020 expiration): +$228.00

= (+$702.00 +$153.00 -$627.00)

1. Absolute Return [If Citigroup options exercised on Oct 29th (business day prior to ex-dividend date)]: +0.6%

= +$75.00/$11,927.01

Annualized Return (If option exercised early): +76.5%

= (+$75.00/$11,927.01)*(365/3 days); or

2. Absolute Return (If Citigroup shares assigned at $40.00 at Nov 6th, 2020 expiration): +1.9%

= +$228.00/$11,927.01

Annualized Return (If Citi stock assigned at $70.00 at Nov 15th expiration): +63.4%

= (+$228.00/$11,927.01)*(365/11 days)

Either outcome would provide a very good return-on-investment result.  These returns will be achieved as long as the stock is above the $40.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $39.24 ($42.09 -$2.34 -$.51) provides 6.8% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of nine criteria to evaluate potential Covered Calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least eight of these nine criteria must be achieved.  As shown in the table below, all nine criteria are achieved for this Citigroup Inc. Covered Calls position.

New Covered Calls Positions Established in IBM Corp., KB Home, and Constellation Brands Inc.

Today, new Covered Calls positions were established in IBM Corp. (IBM), KB Home (KBH), and Constellation Brands Inc. (STZ).  All three positions are similar to ones previously established this year in these three stocks in months with an intervening ex-dividend date prior to their options expiration date.  So, the possibility of early assignment on the day prior to ex-dividend is included in the potential return-on-investment details provided below for each stock.  As strongly preferred by the Covered Calls Advisor, there are no quarterly earnings reports prior to the November 20th, 2020 options expiration dates for any of these positions.  Also, consistent with the Covered Calls Advisor's cautious outlook, moderately in-the-money Covered Calls were established in all 3 positions.

Two hundred IBM Corp. shares were purchased at $113.40 and two $110.00 November 20th, 2020 Call options were sold at $5.16, a net debit of $108.24 per share.  Three hundred KB Home shares were purchased at $37.08 and three $35.00 November 20th, 2020 Call options were sold at $3.34, a net debit of $33.74 per share.  One hundred Constellation Brands shares were purchased at $179.48 and one Nov 20th, 2020 $170.00 Call option was sold at $12.12 for a net debit of $167.36.


As detailed below, some potential return-on-investment results for these three Covered Calls are: 

• IBM Corp.: (a) +1.6% absolute return in 18 days (equivalent to a +33.0% annualized return-on-investment) if assigned on the day prior to the 11/9/2020 ex-dividend date; OR (b) +3.1% absolute return in 30 days (equivalent to a +38.1% annualized return-on-investment) if assigned on the Nov. 20th, 2020 options expiration date.
• KB Home: (a) +3.7% absolute return in 19 days (equivalent to a +71.7% annualized return-on-investment) if assigned on the last business day prior to the November 10th, 2020 ex-dividend date; OR (b) +4.2% absolute return in 30 days (equivalent to a +50.8% annualized return-on-investment) if assigned on the Nov. 20th, 2020 options expiration date.
• Constellation Brands Inc.: (a) +1.6% absolute return in 14 days (equivalent to a +41.4% annualized return-on-investment) if assigned on the last business day prior to the November 5th, 2020 ex-dividend date; OR (b) +2.0% absolute return in 30 days (equivalent to a +24.6% annualized return-on-investment) if assigned on the Nov. 20th, 2020 options expiration date.

1.  IBM Corp. (IBM) -- New Covered Calls Position
The buy/write transaction was:
10/22/2020 Bought 200 IBM shares @ $113.40
10/22/2020 Sold 2 IBM 11/20/2020 $110.00 Call options @ $5.16
Note: the Time Value (aka Extrinsic Value) in the Call options was $1.76 per share = [$5.16 Call options premium - ($113.40 stock price - $110.00 strike price)]
11/09/2020 Expected upcoming quarterly ex-dividend of $1.63 per share

Two possible overall performance results (including commissions) for this IBM Covered Calls position are as follows:
Covered Calls Cost Basis: $21,649.34
= ($113.40 - $5.16) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,032.00
= ($5.16 * 200 shares)
(b) Dividend Income (If option exercised early on Nov 6th, the business day prior to the Nov 9th ex-div date): +$0.00; or
(b) Dividend Income (If IBM stock assigned at Nov. 20th, 2020 expiration): +$326.00
= ($1.63 dividend per share x 200 shares)

(c) Capital Appreciation (If IBM Call options assigned early on Nov 6th): -$680.00
+($110.00 - $113.40) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $110.00 strike price at options expiration): -$680.00
+($110.00 - $113.40) * 200 shares

1. Total Net Profit [If option exercised on Nov 6th (business day prior to Nov 9th ex-dividend date)]: +$352.00

= (+$1,032.00 options income +$0.00 dividend income -$680.00 capital appreciation); or

2. Total Net Profit (If IBM shares assigned at $110.00 strike price at November 20th, 2020 expiration): +$678.00

= (+$1,032.00 +$326.00 -$680.00)

1. Absolute Return (If two IBM Call options exercised early on Nov 6th): +1.6%

= +$352.00/$21,649.34

Annualized Return (If option exercised early): +33.0%

= (+$352.00/$21,649.34)*(365/18 days); or

2. Absolute Return (If IBM shares assigned at $110.00 at November 20th, 2020 options expiration): +3.1%

= +$678.00/$21,649.34

Annualized Return (If IBM shares assigned at $120.00 at Aug 28th, 2020 expiration): +38.1%

= (+$678.00/$21,649.34) * (365/30 days)

Either outcome provides an attractive return-on-investment result for this IBM investment.  These returns will be achieved as long as the stock is above the $110.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $106.61 ($113.40 -$5.16 -$1.63) provides 6.0% downside protection below today's stock purchase price.


2.   KB Home (KBH) -- New Covered Calls Position
The Buy/Write transaction today was as follows:
10/22/2020 Bought 300 shares of KB Home stock @ $37.08 per share 
10/22/2020 Sold 3 KB Home November 20th, 2020 $35.00 Call options @ $3.34 per share
Note: the Delta was 67.5 when this transaction was executed. 
11/10/2020 Upcoming quarterly ex-dividend of $.15 per share

A possible overall performance results (including commissions) if the stock price is above the $35.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $10,124.01
= ($37.08 - $3.34) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,002.00
= ($3.34 * 300 shares)
(b) Dividend Income: (If option exercised early on Nov 9th, the day prior to the Nov 10th ex-div date): +$0.00; or
(b) Dividend Income (If KBH stock assigned at Nov. 20th, 2020 expiration): +$45.00
= ($.15 dividend per share x 300 shares)

(c) Capital Appreciation (If KBH Call options assigned early on Nov 9th): -$624.00
+($35.00 - $37.08) * 300 shares; or
(c) Capital Appreciation (If KBH shares assigned at $35.00 strike price at options expiration): -$624.00
+($35.00 - $37.08) * 300 shares

1. Total Net Profit [If option exercised on Nov 9th (business day prior to Nov 10th ex-dividend date)]: +$378.00

= (+$1,002.00 options income +$0.00 dividend income -$624.00 capital appreciation); or

2. Total Net Profit (If KBH shares assigned at $35.00 strike price at November 20th, 2020 expiration): +$423.00

= (+$1,002.00 +$45.00 -$624.00)

1. Absolute Return (If two KBH Call options exercised early on Nov 6th): +3.7%

= +$378.00/$10,124.01

Annualized Return (If option exercised early): +71.7%

= (+$378.00/$10,124.01)*(365/19 days); or

2. Absolute Return (If KBH shares assigned at $35.00 at November 20th, 2020 options expiration): +4.2%

= +$423.00/$10,124.01

Annualized Return (If KBH shares assigned at $35.00 at Nov. 20th, 2020 expiration): +50.8%

= (+$423.00/$10,124.01) * (365/30 days)

3.  Constellation Brands Inc. (STZ) -- New Covered Call Position
The simultaneous buy/write transaction was:
10/22/2020 Bought 100 Constellation Brands shares @ $179.48
10/22/2020 Sold 1 Constellation Brands 11/20/2020 $170.00 Call option @ $12.12
Note: the Implied Volatility of these Calls was 30.5 when this transaction was executed.
11/05/2020 Upcoming quarterly ex-dividend of $.75 per share

Two possible overall performance results (including commissions) for this Constellation Brands Covered Call position are as follows:
Covered Call Cost Basis: $16,736.67
= ($179.48 - $12.12) *100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$1,212.00
= ($12.12 * 100 shares)
(b) Dividend Income (If option exercised early on Nov 4th, the last business day prior to the Nov 5th, 2020 ex-div date): +$0.00; or
(b) Dividend Income (If Constellation Brands stock assigned at Nov 20th, 2020 expiration): +$75.00
= ($.75 dividend per share x 100 shares)

(c) Capital Appreciation (If Constellation Brands assigned early on Nov 4th, 2020): -$948.00
+($170.00 - $179.48) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $170.00 strike price at options expiration): -$948.00
+($170.00 - $179.48) * 100 shares

1. Total Net Profit [If option exercised on Nov 4th (business day prior to Nov 5th ex-dividend date)]: +$264.00

= (+$1,212.00 option income +$0.00 dividend income -$948.00 capital appreciation); or

2. Total Net Profit (If Constellation Brands shares assigned at $170.00 at Nov 20th, 2020 expiration): +$339.00

= (+$1,212.00 option income +$75.00 dividend income -$948.00 capital appreciation)

1. Absolute Return [If option exercised on Nov 4th, 2020 (day prior to ex-dividend date)]: +1.6%

= +$264.00/$16,736.67

Annualized Return (If option exercised early): +41.1%

= (+$264.00/$16,736.67)*(365/14 days); or

2. Absolute Return (If STZ shares assigned at $170.00 at Nov 20th, 2020 options expiration): +2.0%

= +$339.00/$16,736.67

Annualized Return (If STZ shares assigned at $170.00 at Nov 20th, 2020 expiration): +24.6%

= (+$339.00/$16,736.67)*(365/30 days)

Established Covered Calls Position in Morgan Stanley Using the Dividend Capture Strategy

Today a Covered Calls position was established in Morgan Stanley (ticker symbol MS) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $51.06 and 2 November 6th, 2020 Call options were sold at $2.80 at the $49.00 strike price. 

Morgan Stanley reported their earnings per share last week and beat the same quarter last year by 29.9% and analysts' estimates by 31.0%.  Given the current coronavirus crisis, the traditional branch banking companies have substantially more exposure to credit losses than the leading Capital Markets banks like Morgan Stanley and Goldman Sachs, which are less risky investments.  Also, Morgan Stanley is currently attractive on a historic valuation basis since its current price to tangible book value ratio of 1.0 is below its prior 10-year average of 1.2x.

There is an upcoming ex-dividend of $.35 per share (a 2.7% annualized dividend yield) on October 29th.  Two potential return-on-investment results for this position are detailed below (including the possibility of early exercise since the ex-dividend is prior to the November 6th options expiration date).  Given the Covered Calls Advisor's current Overall Market Meter outlook, a conservative in-the-money Covered Calls position was established -- the Delta was 69.4, which approximates the probability that the Call options will be in-the-money on the options expiration date. 

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

•  +1.5% absolute return (equivalent to +56.0% annualized return for the next 10 days) if the stock is assigned early (business day prior to the October 29th ex-dividend date); OR 

• +2.3% absolute return (equivalent to +43.4% annualized return over the next 19 days) if the stock is assigned on the November 6th options expiration date.

This Morgan Stanley Covered Calls position is the first position in the Covered Calls Advisor Portfolio with a November options expiration date.  We are very early in the earnings reporting season and the Covered Calls Advisor intends to establish additional positions, but will do so gradually.  I will be watching earnings releases closely each day during the next few weeks and will limit establishing new positions primarily to companies that have reported their quarterly earnings and therefore have no intervening earnings report prior to the November options expiration dates.   

Morgan Stanley (MS) -- New Covered Calls Position
The buy/write transaction was:
10/19/2020 Bought 200 Morgan Stanley shares @ $51.06
10/19/2020 Sold 2 Morgan Stanley 11/06/2020 $49.00 Call options @ $2.80
Note: the Time Value (aka Extrinsic Value) in the Call options was $.74 per share = [$2.80 Call options premium - ($51.06 stock price - $49.00 strike price)]
10/29/2020 Upcoming quarterly ex-dividend of $.35 per share

Two possible overall performance results (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $9,653.34
= ($51.06 - $2.80) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$560.00
= ($2.80 * 200 shares)
(b) Dividend Income (If option exercised early on Oct 28th, the business day prior to the Oct 29th ex-div date): +$0.00; or
(b) Dividend Income (If Morgan Stanley stock assigned at Nov 6th, 2020 expiration): +$70.00
= ($.35 dividend per share x 200 shares)

(c) Capital Appreciation (If Morgan Stanley Call options assigned early on Oct 28th): -$412.00
+($49.00 - $51.06) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $49.00 strike price at options expiration): -$412.00
+($49.00 - $51.06) * 200 shares

1. Total Net Profit [If option exercised on Oct 28th (business day prior to Oct 29th ex-dividend date)]: +$148.00

= (+$560.00 options income +$0.00 dividend income -$412.00 capital appreciation); or

2. Total Net Profit (If Morgan Stanley shares assigned at $49.00 strike price at November 6th, 2020 expiration): +$218.00

= (+$560.00 +$70.00 -$412.00)

1. Absolute Return (If option exercised early on July 29th): +1.5%

= +$148.00/$9,653.34

Annualized Return (If option exercised early): +56.0%

= (+$148.00/$9,653.34)*(365/10 days); or

2. Absolute Return (If Morgan Stanley shares assigned at $49.00 at Nov 6th, 2020 options expiration): +2.3%

= +$218.00/$9,653.34

Annualized Return (If Morgan Stanley shares assigned at $48.00 at Aug 7th, 2020 expiration): +43.4%

= (+$218.00/$9,653.34)*(365/19 days)

Either outcome provides an attractive return-on-investment result for this Morgan Stanley investment.  These returns will be achieved as long as the stock is above the $49.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $47.91 ($51.06 -$2.80 -$.35) provides 6.2% 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 Morgan Stanley position, all nine criteria were met.

October 16th, 2020 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had ten positions since last month's (September 18th, 2020) monthly options expiration date.  The Covered Calls Advisor is pleased that nine of these ten positions have been closed out profitably.  The results of these ten positions were:

• Three positions expired on the October 16th, 2020 monthly options expiration date with the following results:

1. Two Cigna Corp. (CI) $155.00 Cash-Secured-Put options expired -- +1.0% absolute return in 15 days (equivalent to +24.3% annualized return-on-investment).
2. Four KB Home (KBH) $34.00 Covered Calls -- +3.2% absolute return in 22 days (equivalent to +52.3% annualized return-on-investment).
3. Three Micron Technology Inc. (MU) $45.00 Covered Calls -- +3.3% absolute return in 22 days (equivalent to +54.1% annualized return-on-investment).

• Four Covered Calls positions using the Dividend Capture strategy were assigned early (the day prior to the ex-dividend date in each case) with the following results:

1. General Dynamics Corp. (GD) -- One $135.00 Covered Call -- +1.4% absolute return in 8 days (equivalent to +65.1% annualized return-on-investment).
2. JPMorgan Chase & Co. (JPM) -- Two $90.00 Covered Calls -- +1.6% absolute return in 12 days (equivalent to +48.1% annualized return-on-investment).
   
3. Lennar Corp. (LEN) -- One $75.00 Covered Call -- +1.1% absolute return in 9 days (equivalent to +42.6% annualized return-on-investment).
   
4. Lincoln National Corp. (LNC) -- Three $27.50 Calls -- +2.3% absolute return in 14 days (equivalent to +60.1% annualized return-on-investment).

• One Covered Call position in Medtronic PLC (MDT) were in-the-money at the October 2nd expiration date so the options expired and the shares sold at the $100.00 strike price.  There was a +1.2% absolute return in 12 days (equivalent to +36.7% annualized return-on-investment).

• One Covered Call position in Goldman Sachs Group Inc. (GS) at the $90.00 strike price was out-of-the-money on the September 18th, 2020 options expiration date and the position was closed out during the September 28th, 2020 trading day.  The result was a +1.1% absolute return in 41 days (equivalent to +9.8% annualized return-on-investment).

Although nine of ten positions were closed out at a profit this month, four Covered Calls in GoHealth Inc. closed out-of-the-money (stock price below the strike price) at the October 16th, 2020 options expiration, so these shares now remain in the Covered Calls Advisor Portfolio (as shown in the right sidebar).  A decision will be made soon to either sell the GoHealth shares or continue with this Covered Calls position by selling November Call options against the 400 shares currently held.  As always, the transactions and return-on-investment results for this position will be posted on this blog site on the same day the transactions occur.

Early Assignment of Lennar Corp. Covered Call

Surprisingly, the one Lennar Corp. October 23rd, 2020 $75.00 Call option was exercised early on the day prior to today's (October 15th) ex-dividend date. The reason this was a surprise to the Covered Calls Advisor was that the owner of this Call option decided to immediately forgo the remaining $.28 time value [$8.35 midpoint value of the Call option's $8.10/$8.60 Bid/Ask price - ($83.07 current stock price - $75.00 strike price)] in the Call to buy the stock and therefore also capture today's $.25 per share ex-dividend. This is a good outcome for the Covered Calls Advisor since the resulting +42.6% annualized return-on-investment (aroi) achieved is better than the +28.1% maximum possible aroi that might have been achieved later at the options expiration date if the stock was above the $75.00 strike price on the expiration date.  As detailed below, a net profit of $78.00 was achieved in nine days since the full $657.00 income (profit) received from selling the options exceeded the $579.00 loss in the stock price.

For any Covered Calls position where there is an ex-dividend date prior to the options expiration date, the Covered Calls Advisor usually prefers to have the stock called away (assigned) early, normally the day prior to the ex-div date.  The reason is that the Covered Calls Advisor's Dividend Capture Strategy spreadsheet was designed to identify in-the-money Covered Call positions where the aroi from early assignment is normally greater than what might be achieved if the stock is instead assigned at the options expiration date -- which was the case with this Lennar position.

Lennar Corp. (LEN) -- Covered Call Position Closed by Early Assignment
The buy/write transaction was:
10/06/2020 Bought 100 Lennar Corp. shares @ $80.79
10/06/2020 Sold 1 LEN 10/23/2020 $75.00 Call option @ $6.57
Note: the Implied Volatility of this Call option was 37.2 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 81.8.
10/14/2020 Lennar Call option owner exercised their option, so the option expired and the 100 Lennar shares owned in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $75.00 strike price.

The overall performance result (including commissions) for this Lennar Corp. Covered Call position was as follows:
Covered Calls Cost Basis: $7,422.67
= ($80.79 - $6.57) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$657.00
= ($6.57 * 100 shares)
(b) Dividend Income (Call option exercised early on October 14h, the business day prior to the October 15th ex-div date): +$0.00

(c) Capital Appreciation (100 LEN shares sold at $75.00 strike price): -$579.00
+($75.00 strike price - $80.79 purchase price) * 100 shares

 Total Net Profit: +$78.00

= (+$657.00 options income +$0.00 dividend income -$579.00 capital appreciation)

 

 Absolute Return: +1.1%

= +$78.00/$7,422.67

Annualized Return: +42.6%

= (+$78.00/$7,422.67)*(365/9 days)

Early Assignment of General Dynamics Corp. and Lincolon National Corp. Covered Calls

Early this morning, the Covered Calls Advisor received email and text notifications from my broker (Schwab) that two Covered Calls positions [General Dynamics Corp. (GD) and Lincoln National Corp. (LNC)] were exercised early by the Call option owners since both positions had ex-dividend dates today (October 8th) and the remaining time value in the options had declined to close to zero.

As detailed below, the return-on-investment results were as follows:

• General Dynamics Corp. -- +1.4% absolute return (equivalent to +65.1% annualized roi for the 8 days this position was held); and 
• Lincoln National Corp. --  +2.3% absolute return (equivalent to +60.1% annualized roi for the 14 days this position was held)
  

1. General Dynamics Corp. (GD) -- Early Assignment of Covered Call Position
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.
10/07/2020 One GD Call option exercised so the 100 shares of General Dynamics stock was sold at the $135.00 strike price.

The overall performance result (including commissions) for this General Dynamics Covered Call position was 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 (Call option exercised early on October 7th, the business day prior to the October 8th ex-div date): +$0.00

(c) Capital Appreciation (GD Call option assigned early on Oct. 7th): -$316.00
+($135.00 - $138.16) * 100 shares

 Total Net Profit: +$190.00

= (+$506.00 options income +$0.00 dividend income -$316.00 capital appreciation)

 

 Absolute Return: +1.4%

= +$190.00/$13,310.67

Annualized Return: +65.1%

= (+$190.00/$13,310.67)*(365/8 days)

2. Lincoln National Corp. (LNC) -- Early Assignment of Covered Calls Position
The 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.
10/07/2020 3 LNC Call options exercised so the 300 shares of Lincoln National stock were sold at the $27.50 strike price.

The overall performance result (including commissions) for this Lincoln National Covered Calls position was 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 (Call options exercised early on October 7th, the business day prior to the October 8th ex-div date): +$0.00

(c) Capital Appreciation: -$765.00
+($27.50 - $30.05) * 300 shares

 

 Total Net Profit: +$186.00

= (+$951.00 options income +$0.00 dividend income -$765.00 capital appreciation)

 

Absolute Return: +2.3%

= +$186.00/$8,066.01

Annualized Return: +60.1%

= (+$186.00/$8,066.01)*(365/14 days)

Established Covered Call Position in Lennar Corp. Using Dividend Capture Strategy

At 3:01pm this afternoon, a buy/write limit order in Lennar Corp. (ticker LEN) was executed at the Covered Calls Advisors' net debit price of $74.22 per share. One hundred shares were purchased at $80.79 and one October 23rd, 2020 Call option was sold for $6.57 at the $75.00 strike price, a time value of $.78 = [$6.57 option premium - ($80.79 stock price - $75.00 strike price)] per share.  

This position uses the Covered Calls Advisor's Dividend Capture Strategy.  Lennar has an upcoming quarterly ex-dividend of $.25 per share on October 15th which is prior to the October 23rd options expiration.  This is equivalent to an absolute annualized dividend yield of 1.2% (at the current $80.79 stock price) and an equivalent annualized dividend yield of 6.3% = [($.25/$80.79) x (365/18 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 23rd expiration date would be desirable to the Covered Calls Advisor given the high annualized return-on-investment upon assignment for either outcome.

As described in the prior position in KB Home, there are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently very positive for homebuilders. In terms of demographics, ages 26-32 are the prime ages for first-time buyers and years 2020 to 2024 will see the largest number of young adults in this age category in U.S. history. In terms of interest rates, 10-year Treasury rates below 2.0% provide attractive, affordable financing for new buyers. The current rate is only .75% and mortgage credit is readily available. Finally, the most recent monthly reading of current supply of houses is only 3.5 months which is an all-time (since 1963 when data was first measured) low.  Historically, supply conditions remain attractive to builders until this inventory factor exceeds 7.0 months.  Also in this regard, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100).  This month's index is at an all-time high (since 1985) of 83 (Note: The lowest rating of 8 was in January 2009).  So we are definitely now in a strong "sellers' market".   The Covered Calls Advisor will continue to track these factors and will likely remain invested in monthly Covered Calls in companies in this industry as long as all three of these metrics remain positive.

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: 

•  +1.1% absolute return (equivalent to +42.6% annualized return for the next 9 days) if the stock is assigned early (business day prior to the October 15th ex-dividend date); OR 

• +1.4% absolute return (equivalent to +28.1% annualized return over the next 18 days) if the stock is assigned on the October 23rd options expiration date.

Lennar Corp. (LEN) -- New Covered Call Position
The buy/write transaction was:
10/06/2020 Bought 100 Lennar Corp. shares @ $80.79
10/06/2020 Sold 1 LEN 10/23/2020 $75.00 Call option @ $6.57
Note: Implied Volatility of the Call options was 37.2 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 81.8.
10/15/2020 Upcoming quarterly ex-dividend of $.25 per share

Two possible overall performance results (including commissions) for this Lennar Corp. Covered Call position are as follows:
Covered Calls Cost Basis: $7,422.67
= ($80.79 - $6.57) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$657.00
= ($6.57 * 100 shares)
(b) Dividend Income (If option exercised early on October 14h, the business day prior to the October 15th ex-div date): +$0.00; or
(b) Dividend Income (If Lennar stock assigned at October 23rd, 2020 options expiration): +$25.00
= ($.25 dividend per share x 100 shares)

(c) Capital Appreciation (If LEN Call option assigned early on Oct. 14th): -$579.00
+($75.00 - $80.79) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $75.00 strike price at options expiration): -$579.00
+($75.00 - $80.79) * 100 shares

1. Total Net Profit [If option exercised on October 14th (business day prior to the October 15th ex-dividend date)]: +$78.00

= (+$657.00 options income +$0.00 dividend income -$579.00 capital appreciation); or

2. Total Net Profit (If LEN shares assigned at $75.00 at Oct 23rd, 2020 expiration): +$103.00

= (+$657.00 +$25.00 -$579.00)

1. Absolute Return [If option exercised on business day prior to ex-dividend date]: +1.1%

= +$78.00/$7,422.67

Annualized Return (If option exercised early): +42.6%

= (+$78.00/$7,422.67)*(365/9 days); or

2. Absolute Return (If Lennar shares assigned on Oct. 23rd options expiration date): +1.4%

= +$103.00/$7,422.67

Annualized Return (If LEN shares assigned at $135.00 at Oct 16th, 2020 expiration): +28.1%

= (+$103.00/$7,422.67)*(365/18 days)

Either outcome provides an attractive return-on-investment result for this Lennar investment.  These returns will be achieved as long as the stock is above the $75.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $73.97 ($80.79 stock price -$6.57 Call option price -$.25 dividend) provides 8.4% 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 Lennar Covered Call position.

October 2nd, 2020 Options Expiration -- Medtronic PLC Covered Calls Position Closed by Assignment

The October 2nd, 2020 $100.00 Covered Calls position in Medtronic PLC (ticker MDT) expired in-the-money, so the 200 shares of Metronic stock were assigned (i.e. sold) at the $100.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +1.2% absolute return (equivalent to +36.7% annualized return-on-investment for the 12 days holding period).

Medtronic PLC (MDT) -- Closed Covered Calls Position by Assignment at Expiration
The Buy/Write transaction was as follows:
09/21/2020 Bought 200 Medtronic PLC shares @ $103.41
09/21/2020 Sold 2 MDT 10/02/2020 $100.00 Call options @ $4.03
Note 1: the Implied Volatility of the Calls was 25.0 when this transaction executed.
Note 2: the Time Value (aka Extrinsic Value) in the Call options was $.62 per share = [$4.03 Call options premium - ($103.41 stock price - $100.00 strike price)]
09/24/2020 Quarterly ex-dividend of $.58 per share x 200 shares = $116.00
10/02/2020 2 MDT 10/02/2020 $100.00 Call options expired with the $101.96 per share stock price above the strike price. So, the 200 shares were assigned (i.e. sold) at the $100.00 strike price.
 

The overall performance result (including commissions) for this Medtronic Covered Calls position was as follows:
Covered Calls Cost Basis: $19,877.34
= ($103.41 - $4.03) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$806.00
= ($4.03 * 200 shares)
(b) Dividend Income (If Medtronic stock assigned at Oct. 2nd, 2020 expiration): +$116.00
= ($.58 dividend per share x 200 shares)
(c) Capital Appreciation (If MDT shares assigned at $100.00 strike price at options expiration): -$682.00
+($100.00 - $103.41) * 200 shares

Total Net Profit (Medtronic shares assigned at $100.00 strike price at Oct 2nd, 2020 expiration): +$240.00

= (+$806.00 options income +$116.00 dividend income -$682.00 capital appreciation)
 

Absolute Return: +1.2%

= +$240.00/$19,877.34

Annualized Return: +36.7%
= (+$240.00/$19,877.34)*(365/12 days)

Early Assignment of JPMorgan Chase & Co. Covered Calls

This morning the Covered Calls Advisor was notified by Schwab that the two JPMorgan Chase & Co. October 16th, 2020 $90.00 Call options were exercised early on October 2nd, the last business day prior to the October 5th ex-dividend date. There was only $.04 time value [$7.93 midpoint of $7.75/$8.10 bid/ask range - ($97.89 stock price - $90.00 strike price)] remaining in the Call options, so the owner of the Calls decided to exercise their right to buy the 200 shares of JPMorgan at the $90.00 strike price and capture Monday's $.90 ex-dividend.  

This is a not an unfavorable outcome for the Covered Calls Advisor -- in fact it is the Covered Calls Advisor's preferred result since the +48.1% annualized return-on-investment (aroi) achieved exceeds the +39.5% maximum possible aroi that might have been achieved later if the stock remained above the $90.00 strike price at market close on the October 16th options expiration date.  Also, since JPMorgan has an upcoming earnings report on October 13th (prior to the options expiration date), this early assignment avoids deciding whether to retain the position through the earnings report or selling out the position prior to earnings to avoid the related uncertainty of that event.  As detailed below, a net profit of $280.00 was achieved in 12 days since the full $1,044.00 income (profit) received from selling the options exceeded the $764.00 net loss in the stock price.


JPMorgan Chase & Co. (JPM) -- Covered Calls Position Closed by Early Assignment

The buy/write transaction was:
09/23/2020 Bought 200 JPM shares @ $93.82
09/23/2019 Sold 2 JPM 10/16/2020 $90.00 Call options @ $5.22
10/02/2020 Early Exercise of JPM 10/16/2020 $90.00 Call options, so 200 shares of JPM were assigned (sold) at the $90.00 strike price.

The overall performance results (including commissions) for this JPM Covered Calls position were as follows:
Stock Purchase Cost: $17,721.34
= ($93.82 - $5.22) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$1,044.00
= ($5.22 *200 shares)
(b) Dividend Income (Options assigned early on Oct. 2nd, the business day prior to October 5th ex-div date): +$0.00
(c) Capital Appreciation (If JPM options assigned early): -$764.00
+($90.00 -$93.82) *200 shares

Total Net Profit [Options exercised on last business day prior to Oct 5th ex-dividend date)]: +$280.00
=(+$1,044.00 options income +$0.00 dividend income -$764.00 capital appreciation)

Absolute Return (Options exercised early on business day prior to ex-dividend date): +1.6%

= +$280.00/$17,721.34

Annualized Return: +48.1%

= (+$280.00/$17,721.34)*(365/12 days)

Established Cash-Secured Puts Position in Cigna Corp.

Shortly after market open this morning, a new position was established in Cigna Corp. (ticker CI) by selling two October 16th, 2020 100% Cash-Secured Put options at the $155.00 strike price at $1.54 when the price of Cigna stock was at $164.21 per share (5.9% above the strike price).  This is a moderately conservative position since the probability of assignment on the options expiration date was 80.2% when this position was established. 

The 36.2 Implied Volatility for these Cigna Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 28.6.   So the $306.66 ($1.54 per share x 200 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options.  Importantly to the Covered Calls Advisor, there is no earnings report prior to the October 16th options expiration date.    The estimated current year P/E (based on the price today when this position was established) is only 8.9, which compares favorably to their prior 5-year average P/E of 13.  Furthermore,  next year's earnings are estimated to exceed this year's.  Cigna's business mix is much improved since its acquisition of Express Scripts in late 2018.  Now, 71% of revenue is obtained from their Pharmacy Benefits Manager (PBM) business and 26% from their Health Insurance business.  The Covered Calls Advisor likes to invest in companies in industries that are oligopolies, and  Express Scripts is #2 in market share of the top 4 companies that now control about 75% of the U.S. PBM market.

As detailed below, for this new Cigna Cash-Secured Puts position there is potential for a +1.0% absolute return in 15 days (equivalent to a +24.3% annualized return-on-investment).  

Cigna Corp. (CI) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
10/02/2020  Sold 2 Cigna October 16th, 2020 $155.00 100% Cash-Secured Put options @ $1.54 per share.
Note: Cash-Secured Puts were sold instead of the comparable strike price Covered Calls position since the liquidity was better for the Puts rather than the Call options.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the two Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $30,693.34
= ($155.00 - $1.54) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$306.66
= ($1.54 *200 shares) - $1.34 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Cigna is above $155.00 strike price at the October 16th expiration): +$0.00
= ($155.00 - $155.00) *200 shares

Total Net Profit (If Cigna stock price is above $155.00 strike price at options expiration): +$306.66
= (+$306.66 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Cigna stock price is above $155.00 strike price at the October 16th options expiration) : +1.0%
= +$306.66/$30,693.34
Annualized Return: +24.3%
= (+$306.66/$30,693.34)*(365/15 days)

The downside 'breakeven price' at expiration is at $153.46 ($155.00 - $1.54), which is 6.5% below the current market price of $164.21.