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.
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)
+($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
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.
