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)