There is an upcoming ex-dividend of $1.01 per share (a 2.7% annualized dividend yield) next Monday (Nov 23rd). 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 December 4th 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 73.8, 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:
- +0.3% absolute return (equivalent to +25.8% annualized return for the next 4 days) if the stock is assigned tomorrow (final business day prior to the November 23rd ex-dividend date); OR
- +1.0% absolute return (equivalent to +22.7% annualized return over the next 16 days) if the stock is assigned on the December 4th options expiration date.
Johnson & Johnson (JNJ) -- New Covered Calls Position
The buy/write transaction was:
11/19/2020 Sold 2 JNJ 12/04/2020 $142.00 Call options @ $4.11
Note: the Time Value (aka Extrinsic Value) in the Call options was $.40 per share = [$4.11 Call options premium - ($145.71 stock price - $142.00 strike price)]
11/23/2020 Upcoming quarterly ex-dividend of $1.01 per share
Two possible overall performance results (including commissions) for this Johnson & Johnson Covered Calls position are as follows:
Covered Calls Cost Basis: $28,321.34
= ($145.71 - $4.11) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$822.00
= ($4.11 * 200 shares)
(b) Dividend Income (If option exercised early on Nov 20th, the business day prior to the Nov 23rd ex-div date): +$0.00; or
(b) Dividend Income (If Johnson & Johnson stock assigned at Dec 4th, 2020 expiration): +$202.00
= ($1.01 dividend per share x 200 shares)
(c) Capital Appreciation (If Johnson & Johnson Call options assigned early on Nov 20th): -$742.00
+($142.00 - $145.71) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $142.00 strike price at options expiration): -$742.00
+($142.00 - $145.71) * 200 shares
+($142.00 - $145.71) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $142.00 strike price at options expiration): -$742.00
+($142.00 - $145.71) * 200 shares
1. Total Net Profit [If Call options exercised on Nov 20th (business day prior to Nov 23rd ex-dividend date)]: +$80.00
= (+$822.00 options income +$0.00 dividend income -$742.00 capital appreciation); or
2. Total Net Profit (If JNJ shares assigned at $142.00 strike price at December 4th, 2020 expiration): +$282.00
= (+$822.00 +$202.00 -$742.00)
1. Absolute Return (If option exercised early on November 20th): +0.3%
= +$80.00/$28,321.34
Annualized Return (If option exercised early): +25.8%
= (+$80.00/$28,321.34)*(365/4 days); or
2. Absolute Return (If Johnson & Johnson shares assigned at $142.00 at Dec 4th, 2020 options expiration): +1.0%
= +$282.00/$28,321.34
Annualized Return (If Johnson & Johnson shares assigned at $142.00 at Dec. 4th, 2020 expiration): +22.7%
= (+$282.00/$28,321.34)*(365/16 days)
Either outcome provides a satisfactory return-on-investment result for this Johnson & Johnson investment. These returns will be achieved as long as the stock is above the $142.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $140.59 ($145.71 -$4.11 -$1.01) provides 3.5% 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 Johnson & Johnson position, all nine criteria were met.
