Early Assignment of Bristol-Myers Squibb Co. and Cardinal Health Inc. Covered Calls

Early this morning, the Covered Calls Advisor received email notifications from my broker (Schwab) that two Covered Calls positions [Bristol-Myers Squibb Co. (BMY) and Cardinal Health Inc. (CAH)] were exercised early by the Call option owners.  The Covered Calls Advisor was somewhat surprised but also pleased that both positions were assigned early (on the day prior to today's ex-dividend date):
(1) "Surprised" because the Call owners chose to immediately forgo the still significant time value remaining in the Call options -- $.495 time value per share [$4.425 midpoint of the Call options' $4.35/$4.50 bid/ask spread - ($61.43 stock price - $57.50 strike price)] for BMY and $.35 time value per share [$3.35 midpoint of the Call options' $3.10/$3.60 bid/ask spread - ($53.00 stock price - $50.00 strike price)] for CAH; and
(2) "Pleased" because the annualized return-on-investment (aroi) for early assignment is greater than the aroi if the Covered Calls would instead have remained in-the-money for both positions at their January 15th, 2021 options expiration date and thus have been assigned then.

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

• Bristol-Myers Squibb Co. -- +1.1% absolute return (equivalent to +22.6% annualized return-on-investment for the 17 days this position was held); and 
• Cardinal Health Inc. --  +0.8% absolute return (equivalent to +31.1% annualized roi for the 9 days this position was held)
  
  

1.  Bristol-Myers Squibb Co. (BMY) -- Covered Calls Position Closed by Early Assignment
The buy/write transaction was:
12/14/2020 Bought 300 Bristol-Myers Squibb Co. shares @ $60.00
12/14/2020 Sold 3 BMY 1/15/2021 $57.50 Call options @ $3.10
Note: The Call options' Implied Volatility(IV) was 23.3 when this position was transacted which is consistent with the Covered Calls Advisor's objective of selling options on companies whose IV exceeds that of the S&P 500 (whose IV is currently at 17.7).  Also, the transaction executed at the $3.10 midpoint of the $3.05/$3.15 bid/ask spread.
12/31/2020 Early exercise of 3 BMY Jan. 15th, 2021 $57.50 Call options, so 300 BMY shares were assigned (i.e. sold) at the $57.50 strike price.

The overall performance results (including commissions) for this Bristol-Myers Squibb Co. Covered Calls position are as follows:
Covered Calls Cost Basis: $17,072.01
= ($60.00 - $3.10) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$930.00
= ($3.10 * 300 shares)
(b) Dividend Income (3 Call options exercised early on Dec 30th, 2020, the business day prior to today's Dec 31st ex-div date): +$0.00

(c) Capital Appreciation (BMY Call options assigned early on Dec 30th, 2020): -$750.00
+($57.50 - $60.00) * 300 shares

 Total Net Profit: +$180.00

= (+$930.00 options income +$0.00 dividend income -$750.00 capital appreciation)

Absolute Return [Call options exercised early on the business day prior to ex-dividend date]: +1.1%

= +$180.00/$17,072.01

Annualized Return: +22.6%

= (+$180.00/$17,072.01)*(365/17 days)

2.  Cardinal Health Inc. (CAH) -- Covered Calls Position Closed by Early Assignment
The Covered Calls Advisor's buy/write limit order at a net debit of $49.62 was transacted as follows:
12/21/2020 Bought 200 Cardinal Health shares @ $53.62
12/21/2020 Sold 2 CAH 01/15/2021 $50.00 Call options @ $4.00 per share.  The Implied Volatility of the Calls was 27.8.
Note: the Time Value (aka Extrinsic Value) in the Call options was $.38 per share = [$4.00 Call options premium - ($53.62 stock price - $50.00 strike price)]
12/31/2020 Early exercise of 2 CAH Jan. 15th, 2021 $50.00 Call options, so 200 CAH shares were assigned (i.e. sold) at the $50.00 strike price.

The overall performance results (including commissions) for this Cardinal Health Covered Calls position are as follows:
Covered Calls Cost Basis: $9,925.34
= ($53.62 - $4.00) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$800.00
= ($4.00 * 200 shares)
(b) Dividend Income (Call options exercised early on Dec. 30th, 2020, the business day prior to the Dec. 31st ex-div date): +$0.00

(c) Capital Appreciation (Cardinal Health Call options assigned early on Dec 30th): -$724.00
+($50.00 - $53.62) * 200 shares

 Total Net Profit [Two Call options exercised on Dec 30th (business day prior to Dec. 31st ex-dividend date)]: +$76.00

= (+$800.00 options income +$0.00 dividend income - $724.00 capital appreciation)

 

Absolute Return (Call options exercised early on Dec. 30th): +0.8%

= +$76.00/$9,925.34

Annualized Return: +31.1%

= (+$76.00/$9,925.34)*(365/9 days)

Established Covered Calls Positions in Cisco Systems Inc. and JPMorgan Chase & Co.

This afternoon, Covered Calls positions were established in Cisco Systems Inc. (ticker symbol CSCO) and JPMorgan Chase & Co. (JPM) when the Covered Calls Advisor's buy/write limit orders were executed. For Cisco Systems, 400 shares were purchased at $44.46 and 4 January 15th, 2021 Call options were sold at $1.17 at the $43.50 strike price.   For JPMorgan Chase & Co., 200 shares were purchased at $125.22 and 2 January 15th, 2021 Call options were sold at $5.78 at the $120.00 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 72.5 for the Cisco Covered Calls position and 80.1 for the JPMorgan 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 $.36 per share for Cisco on January 4th, 2021 and $.90 for JPMorgan on January 5th, 2021.

Potential results for these Covered Calls positions, as detailed below, includes the possibility of early assignment since these ex-dividends are prior to the January 15th options expiration date, although early assignment is unlikely since (because the market is closed on the January 1st New Year's Day holiday) there is only one market trading day prior to the Cisco ex-dividend and two prior to the JPM ex-dividend date.  There is not a quarterly earnings report prior to the Jan. 15th options expiration date for Cisco, but there is a quarterly earnings report before market open on Jan. 15th for JPMorgan -- so this JPM Covered Calls position will most likely be closed out prior to the options expiration date.

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

• For Cisco Systems Inc.: +0.5% absolute return (equivalent to +35.3% annualized return-on-investment for the next 5 days) if the stock is assigned early (last trading day prior to the January 4th ex-dividend date); OR (2) +1.3% absolute return (equivalent to +28.3% annualized return over the next 17 days) if the stock is assigned on the January 15th options expiration date.

• For JPMorgan Chase & Co.: +0.5% absolute return (equivalent to +28.5% annualized return-on-investment for the next 6 days) if the stock is assigned early (last trading day prior to the January 5th ex-dividend date); OR (2) +1.2% absolute return (equivalent to +26.2% annualized return over the next 17 days) if the stock is assigned on the January 15th options expiration date.

1.  Cisco Systems Inc. (CSCO) -- New Covered Calls Position

The buy/write transaction was:
12/30/2020 Bought 400 Cisco shares @ $44.46
12/30/2020 Sold 4 Cisco 01/15/2021 $43.50 Call options @ $1.17
Note: the Time Value (aka Extrinsic Value) in the Call options was $.21 per share = [$1.17 Call options premium - ($44.46 stock price - $43.50 strike price)]
01/04/2021 Upcoming quarterly ex-dividend of $.36 per share

Two possible overall performance results (including commissions) for this Cisco Covered Calls position are as follows:
Covered Calls Cost Basis: $17,318.68
= ($44.46 - $1.17) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$468.00
= ($1.17 * 400 shares)
(b) Dividend Income (If option exercised early on Dec. 31st, 2020, the last business day prior to the Jan. 4th, 2021 ex-div date): +$0.00; or
(b) Dividend Income (If Cisco stock assigned at January 15th, 2021 expiration): +$144.00
= ($.36 dividend per share x 400 shares)

(c) Capital Appreciation (If CSCO Call options assigned early on Dec. 31st, 2020): -$384.00
+($43.50 - $44.46) * 400 shares; or
(c) Capital Appreciation (If CSCO shares assigned at $43.50 strike price at options expiration): -$384.00
+($43.50 - $44.46) * 400 shares

1. Total Net Profit [If option exercised on Dec. 31st, 2020 (last business day prior to Jan 4th ex-dividend date)]: +$84.00

= (+$468.00 options income +$0.00 dividend income -$384.00 capital appreciation); or

2. Total Net Profit (If Cisco shares assigned at $43.50 strike price at January 15th, 2021 expiration): +$228.00

= (+$468.00 +$144.00 -$384.00)

1. Absolute Return (If four Cisco Call options exercised early on Dec. 31st): +0.5%

= +$84.00/$17,318.68

Annualized Return (If option exercised early): +35.3%

= (+$84.00/$17,318.68)*(365/5 days); or

2. Absolute Return (If Cisco shares assigned at $43.50 at Jan. 15th, 2021 options expiration): +1.3%

= +$228.00/$17,318.68

Annualized Return (If Cisco shares assigned at $43.50 at 1/15/21 expiration): +28.3%

= (+$228.00/$17,318.68)*(365/17 days)

Either outcome provides a satisfactory return-on-investment result for this Cisco Systems investment.  These returns will be achieved as long as the stock is above the $43.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $42.93 ($44.46 -$1.17 -$.36) provides 3.4% 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 must be 'YES' prior to establishing a position.  As shown below with this Cisco Systems position, all nine criteria were met.

2.  JPMorgan Chase & Co. (JPM) -- New Covered Calls Position

The buy/write transaction was:
12/30/2020 Bought 200 JPM shares @ $125.22
12/30/2020 Sold 2 JPM 01/15/2021 $120.00 Call options @ $5.78
01/05/2021 Upcoming quarterly ex-dividend of $.90 per share

Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost: $23,889.34
= ($125.22 - $5.78) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$1,156.00
= ($5.78 *200 shares)
(b) Dividend Income (If option exercised early on January 4th, 2021 the business day prior to the Jan. 5th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at January 15th, 2021 expiration): +$180.00
= ($.90 dividend per share x 200 shares)

(c) Capital Appreciation (If JPM assigned early): -$1,044.00
+($120.00 -$125.22)*200 shares; or
(c) Capital Appreciation (If JPM assigned at $120.00 strike price at expiration): -$1,044.00
+($120.00-$125.22) * 200 shares

1. Total Net Profit [If option exercised on January 4th (business day prior to Jan. 5th, 2021 ex-dividend date)]: +$112.00

= (+$1,156.00 options income +$0.00 dividend income -$1,044.00 capital appreciation); or

2. Total Net Profit (If JPM assigned at $120.00 at Jan. 15th, 2021 expiration): +$292.00

= (+$1,156.00 options income +$180.00 dividend income -$1,044.00 capital appreciation)

1. Absolute Return (If option exercised on business day prior to ex-dividend date): +0.5%

= +$112.00/$23,889.34

Annualized Return (If option exercised early): +28.5%

= (+$112.00/$23,889.34)*(365/6 days); or

2. Absolute Return (If JPM assigned at $120.00 at the Jan. 15th, 2021 expiration): +1.2%

= +$292.00/$23,889.34

Annualized Return (If JPM assigned at $120.00 at the Jan. 15th, 2021 expiration): +26.2%

= (+$292.00/$23,889.34)*(365/17 days)

Either outcome provides a very good return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $120.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $118.54 ($125.22 -$5.78 -$.90) provides 5.3% downside protection below today's purchase price.

There is a 80.1% probability that the Calls will be above the $120.00 strike price at options expiration.  If so, the +26.2%  annualized roi profit detailed above would be achieved.

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.  As shown below, in this case only seven of the nine criteria are achieved, but the Covered Calls Advisor still decided to enter this position.

Covered Call Established in FMC Corporation

A Covered Call position was established this morning in FMC Corporation (ticker FMC), with a January 15th, 2021 options expiration date. One hundred shares of FMC were purchased at $113.24 and one Call option was sold at $4.40 per share at the $110.00 strike price.  

The time value was $1.16 per share [$110.00 strike price - ($113.24 share price - $4.40 Call option premium)] when this buy/write limit order transaction was executed. The stock goes ex-dividend at $.48 per share (1.7% annual dividend yield) this Wednesday (12/30/2020) and this is included in the calculations below.

A potential return-on-investment result if this position closes in-the-money at the January 15th options expiration date is +1.5% absolute return in 19 days (equivalent to a +28.9% annualized return-on-investment).   The delta was 69.5 when this position was established, which is the approximate probability that it will close in-the-money on the options expiration date in which case, as detailed below, the maximum potential profit would be achieved.

FMC Corporation (FMC) -- New Covered Call Position
The buy/write transaction was as follows:
12/28/2020 Bought 100 shares of the FMC Corporation @ $113.24 per share 
12/28/2020 Sold 1 FMC Jan 15th, 2021 $110.00 Call option @ $4.40 per share
Note: the Implied Volatility of these Call options was 23.6 when this position was established.
12/30/2020 Ex-dividend of $.48 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $10,884.67
= ($113.24 - $4.40) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$440.00
= ($4.40 * 100 shares)
(b) Dividend Income: +$48.00
= $.48 per share x 100 shares 
(c) Capital Appreciation (If FMC is above $110.00 strike price at the January 15th, 2021 options expiration date): -$324.00
= ($110.00 -$113.24) * 100 shares

Total Net Profit: +$164.00
= (+$440.00 options income +$48.00 dividend income -$324.00 capital appreciation)

Absolute Return: +1.5%
= +$164.00/$10,884.67
Equivalent Annualized Return: +28.9%
= (+$164.00/$10,884.67)*(365/19 days)

These returns will be achieved if the FMC Corporation is above the $110.00 strike price at the market closing on the January 15th, 2021 options expiration date.  If the stock declines below the strike price, the breakeven price of $108.36 ($113.24 -$4.40 -$.48) provides 4.3% downside breakeven protection below today's FMC purchase price.

Please email me at partlow@cox.net if you have any comments or questions related to this post or anything related to Covered Calls investing.

Jeff Partlow

December 24th, 2020 Options Expiration -- Best Buy Inc. Covered Calls Position Assigned

The December 24th, 2020 $100.00 Covered Calls position in Best Buy Inc. (ticker BBY) expired in-the-money, so the 200 shares of Best Buy stock were assigned (i.e. sold) at the $100.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +2.2% absolute return (equivalent to +48.0% annualized return-on-investment for the 17 days holding period).

Best Buy Inc. (BBY) -- Covered Calls Position Closed
The transactions were:
12/08/2020 Bought 200 BBY shares @ $103.05
12/08/2020 Sold 2 BBY Dec. 24, 2020 $100.00 Call options @ $4.70 per share.
Note: the Implied Volatility for these Call options was 31.8 when this simultaneous buy/write transaction was executed.
12/14/2020 Quarterly ex-dividend of $.55 per share
12/24/2020 200 shares of Best Buy stock closed in-the-money, so the two 12/24/2020 $100.00 Call options expired and the 200 shares of BBY stock were sold at the $100.00 strike price.
Note: the price of BBY stock was $102.55 at the market close on 12/24/2020.

The overall performance result (including commissions) for this Best Buy Covered Calls position was as follows:
Covered Calls Position Cost Basis: $19,671.34
= ($103.05 stock price - $4.70 options price) *200 shares +$1.34 commissions

Net Profit:
(a) Options Income: +$940.00
= ($4.70 *200 shares)
(b) Dividend Income (BBY assigned at Dec 24th, 2020 expiration): +$110.00
= ($.55 dividend per share x 200 shares)

(c) Capital Appreciation: -$610.00
+($100.00 -$103.05) *200 shares

Total Net Profit (Best Buy shares assigned at $100.00 strike price at expiration): +$440.00

= (+$940.00 options income +$110.00 dividend income -$610.00 capital appreciation)

Absolute Return (BBY assigned at $100.00 on Dec 24th, 2020 expiration date): +2.2%

= +$440.00/$19,671.34

Annualized Return-on-Investment: +48.0%

= (+$440.00/$19,671.34)*(365/17 days)

Happy Holidays!
Jeff

Established Covered Calls Positions in Anthem Inc., Cardinal Health Inc., and Facebook Inc.

This morning, Covered Calls positions were established in Anthem Inc.(ticker symbol ANTM), Cardinal Health Inc.(CAH), and Facebook Inc. (FB) when the Covered Calls Advisor's buy/write limit orders were executed. For Anthem, 100 shares were purchased at $301.59 and 1 January 15th, 2021 Call option was sold at $18.11 at the $290.00 strike price.   For Cardinal Health, 200 shares were purchased at $53.62 and 2 January 15th, 2021 Call options were sold at $4.00 at the $50.00 strike price.  For Facebook, 100 shares were purchased at $268.37 and 1 December 31st, 2020 Call option was sold at $15.63 at the $255.00 strike price. Given the Covered Calls Advisor's current cautious outlook, moderately in-the-money Covered Calls positions were established for each position. The respective Deltas were 67.4 for the Anthem Inc. Covered Call, 80.2 for Cardinal Health, and 78.6 for Facebook, which approximates the probability that the Call options will be in-the-money on the options expiration date. In addition, there is an upcoming ex-dividend of $.4859 per share for the Cardinal Health position on December 30th and potential results for this Covered Calls position includes the possibility of early exercise since this ex-dividend is prior to the options expiration date.  Also, very important to the Covered Calls Advisor, none of these companies have a quarterly earnings report prior to their options expiration dates.

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

• For Anthem Inc.:  +2.3% absolute return (equivalent to +32.3% annualized return-on-investment for the next 26 days) if the stock is assigned on the January 15th, 2021 options expiration date.

• For Cardinal Health Inc.:  +0.8% absolute return (equivalent to +31.1% annualized return-on-investment for the next 9 days) if the stock is assigned early (business day prior to the December 30th ex-dividend date); OR (2) +1.7% absolute return (equivalent to +24.5% annualized return over the next 26 days) if the stock is assigned on the Jan. 15th options expiration date.

• For Facebook Inc.:  +0.9% absolute return (equivalent to +29.7% annualized return over the next 11 days) if the stock is assigned on the December 31st, 2020 options expiration date.

1.  Anthem Inc. (ANTM) -- New Covered Call Position

The Covered Calls Advisor's buy/write limit order at a net debit of $283.48 was transacted as follows:
12/21/2020 Bought 100 Anthem shares @ $301.59
12/21/2020 Sold 1 Anthem 01/15/2021 $290.00 Call option @ $18.11.  The Implied Volatility of the Call option was 30.2 when this transaction was executed.
Note: the Time Value (aka Extrinsic Value) in the Call option was $6.52 per share = [$18.11 Call option premium - ($301.59 stock price - $290.00 strike price)]

A possible overall performance result (including commissions) for this Anthem Inc. Covered Call position is as follows:
Covered Calls Cost Basis: $28,348.67
= ($301.59 - $18.11) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$1,811.00
= ($18.11 * 100 shares)
(b) Dividend Income (If Anthem stock assigned at Jan. 15th, 2021 expiration): +$0.00

(c) Capital Appreciation (If ANTM shares assigned at $290.00 strike price at options expiration): -$1,159.00
+($290.00 - $301.59) * 100 shares

 Total Net Profit (If Anthem shares assigned at $290.00 strike price at January 15th, 2021 expiration): +$652.00

= (+$1,811.00 option income +$0.00 dividend income -$1,159.00 capital appreciation)

Absolute Return  (If Anthem shares assigned at $290.00 at Jan. 15th, 2021 expiration): +2.3%

= (+$652.00/$28,348.67)

Annualized Return-on-Investment: +32.3%

= (+$652.00/$28,348.67)*(365/26 days)

2.  Cardinal Health Inc. (CAH) -- New Covered Calls Position
The Covered Calls Advisor's buy/write limit order at a net debit of $49.62 was transacted as follows:
12/21/2020 Bought 200 Cardinal Health shares @ $53.62
12/21/2020 Sold 2 CAH 01/15/2021 $50.00 Call options @ $4.00 per share.  The Implied Volatility of the Calls was 27.8.
Note: the Time Value (aka Extrinsic Value) in the Call options was $.38 per share = [$4.00 Call options premium - ($53.62 stock price - $50.00 strike price)]
12/30/2020 Upcoming quarterly ex-dividend of $.4859 per share

Two possible overall performance results (including commissions) for this Cardinal Health Covered Calls position are as follows:
Covered Calls Cost Basis: $9,925.34
= ($53.62 - $4.00) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$800.00
= ($4.00 * 200 shares)
(b) Dividend Income (If option exercised early on Dec. 29th, 2020, the business day prior to the Dec. 30th ex-div date): +$0.00; or
(b) Dividend Income (If Cardinal Health stock assigned at Jan. 15th, 2021 expiration): +$97.18
= ($.4859 dividend per share x 200 shares)

(c) Capital Appreciation (If Cardinal Health Call options assigned early on Dec 29th): -$724.00
+($50.00 - $53.62) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $50.00 strike price at January 15th, 2021 options expiration): -$724.00
+($50.00 - $53.62) * 200 shares

1. Total Net Profit [If option exercised on Dec 29th (business day prior to Dec. 30th ex-dividend date)]: +$76.00

= (+$800.00 options income +$0.00 dividend income - $724.00 capital appreciation); or

2. Total Net Profit (If Cardinal Health shares assigned at $50.00 strike price at Jan. 15th, 2021 expiration): +$173.18

= (+$800.00 options income +$97.18 dividend income -$724.00 capital appreciation)

1. Absolute Return (If option exercised early on Dec. 29th): +0.8%

= +$76.00/$9,925.34

Annualized Return (If option exercised early): +31.1%

= (+$76.00/$9,925.34)*(365/9 days); or

2. Absolute Return (If Cardinal Health shares assigned at $50.00 at Jan. 15th, 2021 options expiration): +1.7%

= +$173.18/$9,925.34

Annualized Return (If CAH shares assigned at $50.00 at Jan. 15, 2021 expiration): +24.5%

= (+$173.18/$9,925.34)*(365/26 days)

Either outcome provides a satisfactory return-on-investment result for this Cardinal Health investment.  These returns will be achieved as long as the stock is above the $50.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $49.1341 ($53.62 -$4.00 -$.4859) 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 must be 'YES' prior to establishing a position.  As shown below with this Cardinal Health position, all nine criteria were met.

3.  Facebook Inc. (FB) -- New Covered Call Position

The Covered Calls Advisor's buy/write limit order was transacted as follows:
12/21/2020 Bought 100 Facebook shares @ $268.37
12/21/2020 Sold 1 Facebook 12/31/2020 $255.00 Call option @ $15.63.  The Implied Volatility of the Call option was 37.8 when this transaction occurred.
Note: the Time Value (aka Extrinsic Value) in the Call option was $2.26 per share = [$15.63 Call option premium - ($268.37 stock price - $255.00 strike price)]

A possible overall performance result (including commissions) for this Facebook Inc. Covered Call position is as follows:
Covered Calls Cost Basis: $25,274.67
= ($268.37 - $15.63) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$1,563.00
= ($15.63 * 100 shares)
(b) Dividend Income (If Facebook stock assigned at Jan. 15th, 2021 expiration): +$0.00

(c) Capital Appreciation (If FB shares assigned at $255.00 strike price at options expiration): -$1,337.00
+($255.00 - $268.37) * 100 shares

 Total Net Profit (If Facebook shares assigned at $255.00 strike price at December 31st, 2020 expiration): +$226.00

= (+$1,563.00 option income +$0.00 dividend income -$1,337.00 capital appreciation)

Absolute Return  (If Facebook shares assigned at $255.00 at Dec. 31st, 2020 expiration): +0.9%

= (+$226.00/$25,274.67)

Annualized Return-on-Investment: +29.7%

= (+226.00/$25,274.67)*(365/11 days)

December 18th, 2020 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had five positions since last month's (November 20th, 2020) monthly options expiration date that were closed out by yesterday's (Dec. 18th, 2020) monthly options expiration date.  The Covered Calls Advisor is pleased that all five positions were closed out profitably.  The results of these five positions were:

• Four positions expired on the Dec. 18th, 2020 monthly options expiration date with the following results:

1. One Alphabet Inc. (GOOGL) $1,700.00 Covered Call -- +1.0% absolute return in 9 days (equivalent to +39.2% annualized return-on-investment). -- Link to Details of Position
   
2. One Anthem Inc. (ANTM) $300.00 Covered Call -- +1.6% absolute return in 19 days (equivalent to +30.9% annualized return-on-investment). -- Link to Details of Position
   
3. Four D.R. Horton Inc. (DHI) $67.50 110% Cash-Secured Puts -- +1.0% absolute return in 8 days (equivalent to +46.7% annualized return-on-investment). -- Link to Details for Position
   
4. One Salesforce.Com Inc. (CRM) $210.00 Covered Call -- +2.6% absolute return in 17 days (equivalent to +55.6% annualized return-on-investment). -- Link to Details of Position
   

• A four Covered Calls position in D.R. Horton Inc. (DHI) at the $70.00 strike price was out-of-the-money (i.e. stock price below the strike price) on the December 11th, 2020 options expiration date and the position was closed out during the following Monday (Dec. 14th) trading day.  The result was a +2.6% absolute return in 13 days (equivalent to +74.3% annualized return-on-investment). -- Link to Returns when Position was Closed 

As shown in the right sidebar, there are currently eight open positions in the Covered Calls Advisor Portfolio with future options expiration dates.  As always, any transactions and return-on-investment results for these positions will be posted on this blog site on the same day the transactions occur.

Best Wishes and Happy Holidays,

Jeff Partlow 

Established Covered Calls Position in Lincoln National Corp. Using Dividend Capture Strategy

At 3:23 pm this afternoon, a buy/write limit order in Lincoln National Corp. (ticker LNC) was executed at the Covered Calls Advisors' net debit price of $43.78 per share. Three hundred shares were purchased at $48.08 and three January 15th, 2021 Call options were sold for $4.30 at the $45.00 strike price, therefore a time value of $1.22 = [$4.30 option premium - ($48.08 stock price - $45.00 strike price)] per share.  This position uses the Covered Calls Advisor's dividend capture strategy and as so it mirrors the LNC dividend capture position last quarter (i.e. 3 months ago) when LNC last went ex-dividend.  FYI, Lincoln Financial Group is the marketing group for LNC and its subsidiaries.

Lincoln National has an upcoming quarterly ex-dividend of $.42 per share on January 8th which is prior to the January 15th options expiration.  This is equivalent to an absolute annualized dividend yield of 3.5% (at the $48.08 stock price) and an equivalent annualized dividend yield of 11.0% = [($.42/$48.08) x (365/29 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 January 15th 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 46.6 when this buy/write transaction was executed -- a nice IV given that the next earnings report on February 3rd is after the Jan. 15th options expiration date.  Consequently, as shown below, this position provides a very attractive potential annualized return-on-investment (aroi) of +48.4% if assigned early or +47.1% if assigned on the options expiration date.  These aroi are especially impressive since a relatively conservative in-the-money Covered Calls position was established with a delta of 69.5 (which provides a good approximation of the probability of assignment at expiration).    

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 $45.00 strike price at closing on the January 15th 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: 

•  +2.8% absolute return (equivalent to +48.4% annualized return for the next 21 days) if the stock is assigned early (business day prior to the January 8th ex-dividend date); OR 

• +3.7% absolute return (equivalent to +47.1% annualized return over the next 29 days) if the stock is assigned on the January 15th options expiration date.

Lincoln National Corp. (LNC) -- New Covered Calls Position
The buy/write transaction was:
12/18/2020 Bought 300 Lincoln National shares @ $48.08
12/18/2020 Sold 3 LNC 01/15/2021 $45.00 Call options @ $4.30
Note: Implied Volatility (IV) of the Call options was at a very attractive level of 46.6 when this position was transacted.  A criteria of the Covered Calls Advisor is that the IV in individual companies should exceed that of the S&P 500 Volatility Index (VIX) -- which was only 21.8 today when this position was established today.  
01/08/2021 Upcoming quarterly ex-dividend of $.42 per share

Two possible overall performance results (including commissions) for this Lincoln National Covered Calls position are as follows:
Covered Calls Cost Basis: $13,136.01
= ($48.08 - $4.30) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,290.00
= ($4.30 * 300 shares)
(b) Dividend Income (If option exercised early on Jan.7th, the business day prior to the Jan. 8th ex-div date): +$0.00; or
(b) Dividend Income (If LNC stock assigned at Jan. 15th, 2021 options expiration): +$126.00
= ($.42 dividend per share x 300 shares)

(c) Capital Appreciation (If LNC Call options assigned early on Jan. 7th): -$924.00
+($45.00 - $48.08) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $45.00 strike price at options expiration): -$924.00
+($45.00 - $48.08) * 300 shares

1. Total Net Profit [If option exercised on January 7th (business day prior to the January 8th ex-dividend date)]: +$366.00

= (+$1,290.00 options income +$0.00 dividend income -$924.00 capital appreciation); or

2. Total Net Profit (If LNC shares assigned at $45.00 at January 15th, 2021 expiration): +$492.00

= (+$1,290.00 +$126.00 -$924.00)

1. Absolute Return [If option exercised on business day prior to ex-dividend date]: +2.8%

= +$366.00/$13,136.01

Annualized Return (If option exercised early): +48.4%

= (+$366.00/$13,136.01)*(365/21 days); or

2. Absolute Return (If LNC shares assigned on Jan. 15th options expiration date): +3.7%

= +$492.00/$13,136.01

Annualized Return (If LNC shares assigned at $45.00 at Jan. 15th, 2021 expiration): +47.1%

= (+$492.00/$13,136.01)*(365/29 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 $45.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $43.36 ($48.08 -$4.30 -$.42) provides 9.8% 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 LNC Covered Calls position.

Roll Up and Out GoHealth Inc. Covered Calls

With 400 GoHealth Inc. (ticker symbol GOCO) shares at $14.34 today and its Covered Calls of December 18th, 2020 at a $12.50 strike price being relatively deep-in-the-money, the Covered Calls Advisor decided to roll-up-and-out to the January 15th, 2021 Calls at the $15.00 strike price.  These transactions were at $1.80 per share on the buy-to-close Dec 18th transaction and $.80 for the sell-to-open the January 15th, 2021 transaction.  The transaction history and potential return-on-investment results for this GoHealth Covered Calls position are detailed below. 

Despite the price decline since these GoHealth shares were initially purchased at $15.00 per share in August, the Covered Calls Advisor continues to be optimistic about GoHealth's current and future prospects. GoHealth is experiencing a large sales growth this quarter versus the same quarter last year because of their expansion of both insurance providers and geographies compounded by the growth in Medicare Advantage policies and the growing reliance by both providers and consumers on e-brokers such as GoHealth.  

As detailed below, two potential return-on-investment results for this GoHealth Inc. position are: (1) +8.3% absolute return in 144 days (equivalent to a +21.1% annualized return-on-investment) if the stock price is unchanged at $14.34 at the January 15th, 2021 options expiration date; or (2) +13.1% absolute return in 144 days (equivalent to a +33.1% annualized return-on-investment) if the stock closes above the $15.00 strike price at expiration.

GoHealth Inc. (GOCO) -- Continuation of Covered Calls Position
The Buy/Write transaction was as follows:
08/24/2020 Bought 400 shares of GoHealth Inc. stock @ $15.00 per share 
08/24/2020 Sold 4 GoHealth Sept 18th, 2020 $15.00 Call options @ $1.05 per share
Note: the Implied Volatility of these Calls was very high at 61.6 today when this transaction was made.
09/18/2020 GOCO Call options expired since stock closed below the strike price
09/23/2020 Sold 4 GOCO Oct 16th, 2020 $15.00 Call options at $.80 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $14.54 today when these Call options were sold.
10/16/2020 GOCO Call options expired since stock closed below the strike price
11/04/2020 Sold 4 GOCO Nov. 20th, 2020 $12.50 Call options at $.70 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $11.82 today when these Call options were sold.
11/20/2020 GOCO Call options expired since stock closed below the strike price
12/04/2020 Sold 4 GOCO Dec. 18th, 2020 $12.50 Call options at $.30 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $11.62 today when these Call options were sold.
12/18/2020 Bought-to-Close 4 GOCO Dec. 18th $12.50 Calls at $1.80
Note: the stock price was $14.24 when this transaction was executed, so the time value remaining in these Calls was $.06 =[$1.80 Call options price - ($14.24 stock price - $12.50 strike price)]
12/18/2020 Sold-to-Open 4 GOCO Jan. 15th, 2021 Call options at $.80 per share.
Note: the price of GOCO stock was $14.34 when these Calls were sold.

Two possible overall performance results (including commissions) are as follows:
Covered Call Cost Basis: $5,582.68
= ($15.00 - $1.05) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$729.28
= ($1.05 + $.80 + $.70 + $.30 - $1.80 + $.80) * 400 shares - $10.72 commissions
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If GoHealth stock is unchanged at $14.34 at Jan. 15th expiration): -$264.00
= ($14.34 - $15.00) * 400 shares; OR
(c) Capital Appreciation (If GoHealth stock is above $15.00 strike price at Jan. 15th expiration): +$0.00
= ($15.00 - $15.00) * 400 shares

1. Total Net Profit (If GOCO stock unchanged at $14.34 at options expiration): +$465.28
= (+$729.28 options income +$0.00 dividend income -$264.00 capital appreciation)
2. Total Net Profit (If GOCO stock closes above $15.00 at Jan. 15th options expiration): +$729.28
= (+$729.28 options income +$0.00 dividend income +$0.00 capital appreciation)

1. Absolute Return (If GoHealth stock price unchanged at $14.34 per share): +8.3%
= +$465.28/$5,582.68
Equivalent Annualized Return: +21.1%
= (+$465.28/$5,582.68)*(365/144 days)
2. Absolute Return (If stock closes above $15.00 strike price at options expiration): +13.1%
= +$729.28/$5,582.68
Equivalent Annualized Return: +33.1%
= (+$729.28/$5,582.68)*(365/144 days)

Covered Calls Established in Energy Select Sector SPDR Fund ETF

A Covered Calls position was established this morning in the Energy Select Sector SPDR Fund ETF (ticker XLE), with a January 15th, 2021 options expiration date. Three hundred shares of the Energy Select Sector SPDR Fund were purchased at $40.01 and three Call options were sold at $2.67 per share at the $38.00 strike price.  

The time value was $.66 per share [$38.00 strike price - ($40.01 share price - $2.67 options premium)] when this buy/write limit order transaction was executed.  The Covered Calls Advisor has found that it is normally the case when there is an intervening ex-dividend (or ex-distribution in this ETF case) prior to the options expiration date, the time value available from establishing a Covered Calls position is greater than that which would be achieved by instead selling the identical position via Cash-Secured Puts.  In this particular case, the $1.1801 ($.66 time value + $.5201 ex-distribution amount) potential from this Covered Calls position slightly exceeded the $1.15 available from the comparable Put options at the time this transaction occurred.  

A potential return-on-investment result if this position closes in-the-money at the January 15th options expiration date is +3.2% absolute return in 30 days (equivalent to a +38.4% annualized return-on-investment).   The delta was 69.0 when this position was established, which is the approximate probability that it will close in-the-money on the options expiration date in which case, as detailed below, the maximum potential profit would be achieved.

Energy Select Sector SPDR Fund ETF (XLE) -- New Covered Calls Position
The buy/write transaction was as follows:
12/17/2020 Bought 300 shares of the Energy Select Sector SPDR Fund @ $40.01 per share 
12/17/2020 Sold 3 XLE Jan 15th, 2021 $38.00 Call options @ $2.67 per share
Note: the Implied Volatility of these Call options was 35.2 when this position was established.
12/18/2020 Ex-distribution estimated at $.5201 per share
 

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $11,204.01
= ($40.01 - $2.67) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$801.00
= ($2.67 * 300 shares)
(b) Quarterly Distribution Income: +$156.03
= $.5201 per share x 300 shares 
(c) Capital Appreciation (If XLE is above $38.00 strike price at the January 15th, 2021 options expiration date): -$603.00
= ($38.00 -$40.01) * 300 shares

Total Net Profit: +$354.03
= (+$801.00 options income +$156.03 distribution income -$603.00 capital appreciation)

Absolute Return: +3.2%
= +$354.03/$11,204.01
Equivalent Annualized Return: +38.4%
= (+$354.03/$11,204.01)*(365/30 days)

These returns will be achieved if the Energy Select Sector SPDR Fund  is above the $38.00 strike price at the market closing on the January 15th, 2021 options expiration date.  If the stock declines below the strike price, the breakeven price of $36.8199 ($40.01 -$2.67 -$.5201) provides 8.0% downside breakeven protection below today's XLE purchase price.

Please email me at partlow@cox.net if you have any comments or questions related to this post or anything related to Covered Calls investing.

Jeff Partlow

Covered Calls Established in D.R. Horton Inc.

This afternoon, the Covered Calls Advisor's limit order was executed and a Covered Calls position was established in D.R. Horton Inc. (ticker DHI) with a December 31st, 2020 options expiration date. Two D.R. Horton Call options were sold at $4.04 at the $67.50 strike price when the stock price was $70.60.  The Delta was approximately 72.5 when this transaction was executed which is a moderately in-the-money position and consistent with the Covered Calls Advisor's current cautious market outlook.  There is already an existing Cash-Secured Puts position in Horton, but its expiration date is Friday and the Covered Calls Advisor wishes to maintain a position in DHI until at least the end of this year -- so this new position was established today.    

D.R. Horton is the largest homebuilder in America by market cap. Importantly, it is considered the best-in-class operator in its industry and has the highest exposure to the critically important entry-level buyers (67% of closings), lowest debt leverage, and least on-balance sheet land risk. The most recent earnings report in early November was very positive and exceeded analysts' average estimates by 27%.  The strong demand for new homes continues to benefit from near-record low mortgage rates.  Important for the Covered Calls Advisor, the next quarterly earnings report is after the December 31st options expiration date.

As detailed below, a potential return-on-investment result is +1.4% absolute return in 16 days (equivalent to a +32.2% annualized return-on-investment).  


D.R. Horton Inc. (DHI) -- New Covered Calls Position

The Buy/Write transaction was as follows:
12/16/2020 Bought 200 shares of D.R. Horton Inc. stock @ $70.60 per share 
12/16/2020 Sold 2 D.R. Horton Dec 31st, 2020 $67.50 Call options @ $4.04 per share

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $13,313.34
= ($70.60 - $4.04) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$808.00
= ($4.04 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If D.R. Horton stock is above $67.50 strike price at the Dec 31st expiration): -$620.00
= ($67.50 - $70.60) * 200 shares

Total Net Profit: +$188.00
= (+$808.00 options income +$0.00 dividend income -$620.00 capital appreciation)

Absolute Return: +1.4%
= +$188.00/$13,313.34
Equivalent Annualized Return: +32.2%
= (+$188.00/$13,313.34)*(365/16 days)

The downside 'breakeven price' at expiration is at $66.56 ($70.60 - $4.04), which is 5.7% below the current market price of $70.60.

Covered Call Position Established in Alibaba Group Holdings Ltd.

A new Covered Call position has been established in Alibaba Group Holdings (ticker BABA) with a December 31st, 2020 options expiration date. One Alibaba Call option was sold at $11.60 at the $250.00 strike price when the stock price was $257.80.  An in-the-money strike price was chosen because of the Covered Calls Advisor's cautious Overall Market Meter outlook.

As detailed below, the potential return-on-investment results are +1.5% absolute return in 18 days (equivalent to a +31.3% annualized return-on-investment).  This is an attractive potential return given that a relatively conservative in-the-money strike price was selected.


Alibaba Group Holdings Ltd. (BABA) -- New Covered Call Position

The transactions were as follows:
12/14/2020 Bought 100 shares of Alibaba stock @ $257.80 per share 
12/14/2020 Sold 1 Alibaba Dec 31st, 2020 $250.00 Call option @ $11.60 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 30.5 when this transaction was executed.  

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $24,620.67
= ($257.80 - $11.60) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$1,160.00
= ($11.60 * 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $250.00 strike price at Dec 31st, 2020 expiration): -$780.00
= ($250.00 -$257.80) * 100 shares

Total Net Profit: +$380.00
= (+$1,160.00 Call option income +$0.00 dividend income -$780.00 capital appreciation)

Absolute Return: +1.5%
= +$380.00/$24,620.67
Equivalent Annualized Return: +31.3%
= (+$380.00/$24,620.67)*(365/18 days)

The downside 'breakeven price' at expiration is at $246.20 ($257.80 - $11.60), which is 4.5% below the current market price of $257.80.

Established Covered Calls Position in Bristol-Myers Squibb Co.

Today a Covered Calls position was established in Bristol-Myers Squibb Co. (ticker symbol BMY) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $60.00 and three January 15th, 2021 Call options were sold at $3.10 at the $57.50 strike price.  This is a conservative in-the-money position since it is 4.3% above the $57.50 strike price.  

Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a quarterly $.49 per share ex-dividend on December 31st is prior to the January 15th options expiration date.   Even if the stock market declines during the next 33 days until options expiration, hopefully the decline will be a modest one and the stock price of  Bristol-Myers will not decline below its $57.50 strike price at closing on the January 15th options expiration date.  If so, the maximum potential profit in this Bristol-Myers position would be achieved.  A positive feature of this position is that the next quarterly earnings report on February 4th, 2021 is after the January 15th options expiration date.  

Bristol-Myers is rated as a Moderate Buy by analysts.  Reuters Research indicates that currently 13 analysts have a Buy or Outperform rating, 5 have a Hold, and none have an Underperform or Strong Sell; and their average target price is $74.29 (23.8% above today's purchase price).  Importantly, most of their fundamental valuation metrics (including various cash flow metrics) are currently better than their prior 5-year average.  Earnings per share of $6.38 are estimated for this year and growth to $7.45 in 2021 which would mean a P/E ratio of only 8.0 on next year's earnings at Bristol's current price of $60.00.  On the down side, Bristol-Myers added substantial long-term debt to its Balance Sheet when it acquired Celgene late last year and MyoKardia last month, although both acquisitions are considered positive for Bristol-Myers.  Morningstar's commentary in support of their wide moat rating is compelling and describes how they are positioned to improve their roic in the near-term future: "Based on a wide lineup of patent-protected drugs, an entrenched salesforce, and economies of scale, Bristol holds a wide economic moat.  The patent protection allows the firm to price its drugs at levels that translate into superior returns on invested capital compared with its cost (particularly in cancer drugs, an area of focus for Bristol).  The patents also provide Bristol with ample time to bring forward the next generation of new drugs.  Additionally, several of their currently marketed drugs are biologics, which create additional hurdles for generic small molecules.  Further, because many small drug companies lack a distribution channel, Bristol's entrenched salesforce enables the company to partner with these smaller drug companies to gain access to externally created drugs, augmenting its internal drug-development efforts.  Additionally, their sheer size generates the strong and stable cash flows required to fund the approximately $800 million needed, on average, to bring each new drug to the market."  

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, BMY stock was down 1.2% today from yesterday's closing price and the 2-day relative strength index [i.e. RSI(2)] for Bristol-Myers moved into short-term oversold territory this afternoon when this buy/write limit order was executed. 

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

•  +1.1% absolute return (equivalent to +22.6% annualized return for the next 17 days) if the stock is assigned early (business day prior to the December 31st ex-dividend date); OR 

• +1.9% absolute return (equivalent to +21.2% annualized return over the next 33 days) if the stock is assigned on the January 15th options expiration date.

 

 Bristol-Myers Squibb Co. (BMY) -- New Covered Calls Position
The buy/write transaction was:
12/14/2020 Bought 300 Bristol-Myers Squibb Co. shares @ $60.00
12/14/2020 Sold 3 BMY 1/15/2021 $57.50 Call options @ $3.10
Note: The Call options' Implied Volatility(IV) was 23.3 when this position was transacted which is consistent with the Covered Calls Advisor's objective of selling options on companies whose IV exceeds that of the S&P 500 (whose IV is currently at 17.7).  Also, the transaction executed at the $3.10 midpoint of the $3.05/$3.15 bid/ask spread.
12/31/2020 Upcoming quarterly ex-dividend of $.49 per share

Two possible overall performance results (including commissions) for this Bristol-Myers Squibb Co. Covered Calls position are as follows:
Covered Calls Cost Basis: $17,072.01
= ($60.00 - $3.10) * 500 shares + $3.35 commission

Net Profit Components:
(a) Options Income: +$930.00
= ($3.10 * 300 shares)
(b) Dividend Income (If option exercised early on Dec 30th, 2020, the business day prior to the Dec 31st ex-div date): +$0.00; or
(b) Dividend Income (If BMY stock assigned at Jan 15th, 2021 options expiration): +$147.00
= ($.49 dividend per share x 300 shares)

(c) Capital Appreciation (If BMY Call options assigned early on Dec 30th, 2020): -$750.00
+($57.50 - $60.00) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $57.50 strike price at options expiration): -$750.00
+($57.50 - $60.00) * 300 shares

1. Total Net Profit [If option exercised on Dec 30th (business day prior to the Dec 31st ex-dividend date)]: +$180.00

= (+$930.00 options income +$0.00 dividend income -$750.00 capital appreciation); or

2. Total Net Profit (If BMY shares assigned at $57.50 at January 15th, 2021 expiration): +$327.00

= (+$930.00 options income +$147.00 dividend income -$750.00 capital appreciation)

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

= +$180.00/$17,072.01

Annualized Return (If option exercised early): +22.6%

= (+$180.00/$17,072.01)*(365/17 days); or

2. Absolute Return (If BMY shares assigned at $57.50 at January 15th, 2021 options expiration): +1.9%

= +$327.00/$17,072.01

Annualized Return (If BMY shares assigned at $57.50 at Jan 15th, 2021 expiration): +21.2%

= (+$327.00/$17,072.01)*(365/33 days)

Either outcome provides a satisfactory annualized return-on-investment result for this Bristol-Myers investment.  These returns will be achieved as long as the stock is above the $57.50 strike price on the options expiration date.  However, if the stock declines below the strike price, the breakeven price of $56.41 ($60.00 -$3.10 -$.49) provides 6.0% downside protection below today's stock purchase price.

There is a 72.0% probability that the Calls will be above the $57.50 strike price at options expiration.  If so, the maximum potential profit detailed above would be achieved.

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 case.

Closed Covered Calls Position in D.R. Horton Inc.

Last Friday (December 11th), the Covered Calls position in D.R. Horton Inc. (ticker DHI) at the $70.00 strike price closed slightly out-of-the-money at $69.91. The stock market opened higher this morning largely because of optimism that Congress will soon pass a $908 billion Covid-19 relief package.  So, soon after the market opened, the Covered Calls Advisor closed out the D.R. Horton position by selling the 400 DHI shares at $70.79.

As detailed below, the return-on-investment result is +2.6% absolute return in 13 days (equivalent to a +74.3% annualized return-on-investment).  
 

D.R. Horton Inc. (DHI) -- Covered Calls Position Closed

The buy/write transaction was as follows:
12/01/2020 Bought 400 shares of D.R. Horton Inc. @ $72.26 per share 
12/01/2020 Sold 4 D.R. Horton Dec 11th, 2020 $70.00 Call options @ $3.10 per share
Note: the Implied Volatility of the Call options was 32.9 when this Covered Calls position was executed.
12/03/2020 Ex-dividend at $.20 per share
12/11/2020 4 DHI 12/11/2020 $70.00 Call options expired. DHI stock closed at $69.91 so 400 shares remain in the Covered Calls Advisor Portfolio
12/14/2020 Sold 400 DHI shares at $70.79 per share

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $27,666.68
= ($72.26 - $3.10) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,240.00
= ($3.10 * 400 shares)
(b) Dividend Income: +$80.00
= $.20 per share x 400 shares 
(c) Capital Appreciation (DHI stock sold at $70.79 per share): -$588.00
= ($70.79 -$72.26) * 400 shares

Total Net Profit: +$732.00
= (+$1,240.00 options income +$80.00 dividend income -$588.00 capital appreciation)

Absolute Return: +2.6%
= +$732.00/$27,666.68

Equivalent Annualized Return: +74.3%
= (+$732.00/$27,666.68)*(365/13 days)

December 11th, 2020 Options Expiration Results

The Covered Calls Advisor Portfolio had a Covered Calls position in D.R. Horton Inc. (ticker DHI) with a December 11th, 2020 options expiration.  This position included 400 shares of DHI stock and 4 short Call options at the $70.00 strike price.  DHI closed slightly out-of-the-money at $69.91 at market close on Friday, so the 4 Calls expired and the Covered Calls Advisor Portfolio now retains the 400 shares of stock.  It is likely that the 400 shares will be sold early Monday and the detailed transactions and return-on-investment results for this position will be detailed in a blog post when that occurs.  

The Covered Calls Advisor wanted to retain a position in D.H. Horton going forward.  Since the DHI stock price was close to the strike price on Friday, there was considerable uncertainty whether or not the Covered Calls position would be assigned at Friday's options expiration at the market close.  So, it was decided to established a new one-week position in D.R. Horton (see prior post today detailing the DHI Cash-Secured Puts position).  The Covered Calls Advisor wanted to maintain a similar sized position going forward in D.R. Horton -- so both this new Cash-Secured Puts position and the just expired Covered Calls position were for 400 shares of stock. 

Established Cash-Secured Puts Position in D.R. Horton Inc.

A new position was established near noon on Friday in D.R. Horton Inc. (ticker DHI) by selling four December 18th, 2020 100% Cash-Secured Put options at the $67.50 strike price at $.69 per share when the price of D.R. Horton stock was $69.79 per share (3.4% above the strike price).  This is a moderately conservative position since the probability of assignment on the options expiration date was 72.4% when this position was established. 

The 38.3 Implied Volatility for these Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 22.   So the $273.32 ($.69 per share x 400 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.  A Cash-Secured Puts position was established rather than a Covered Calls position in this case since the time value available in the Puts was $.02 per share greater than the comparable time value in the comparable Calls at the time when the transaction was made.  Also important to the Covered Calls Advisor, there is no earnings report prior to the options expiration date.     

D.R. Horton is the largest homebuilder in America by market cap. Importantly, it is considered the best-in-class operator in its industry and has the highest exposure to the critically important entry-level buyers (67% of closings), lowest debt leverage, and least on-balance sheet land risk.  

As detailed below, for this new D.R. Horton Cash-Secured Puts position there is potential for a +1.0% absolute return in 8 days (equivalent to a +46.7% annualized return-on-investment).  

D.R. Horton Inc. (DHI) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
12/11/2020  Sold 4 D.R. Horton Inc. December 18th, 2020 $67.50 100% Cash-Secured Put options @ $.69 per share.

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 four Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $26,726.68
= ($67.50 - $.69) *400 shares + $2.68 commission

Net Profit:
(a) Options Income: +$273.32
= ($.69 *400 shares) - $2.68 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DHI is above $67.50 strike price at the Dec 18th expiration): +$0.00
= ($67.50 - $67.50) * 400 shares

Total Net Profit (If D.R. Horton stock price is above $67.50 strike price at options expiration): +$273.32
= (+$273.32 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If D.R. Horton stock price is above $67.50 strike price at the December 18th options expiration) : +1.0%
= +$273.32/$26,726.88
Annualized Return: +46.7%
= (+$273.32/$26,726.88)*(365/8 days)

The downside 'breakeven price' at expiration is at $66.81 ($67.50 - $.69), which is 4.3% below the current market price of $69.79.

Covered Calls in Draftkings Inc. -- Counteracting the Greed Factor?

There has been a lot of discussion in the last few months about the speculative buying of stock and options, especially by new millennial investors. CNBC commentator Jim Cramer recently called this "the most speculative market I've ever seen". 

One of the most common trades by market speculators is Buying Call Options.   During the last five trading days, volume in Put options has lagged volume in Call options by 67.31% as investors make bullish bets in their portfolios.  As shown in the chart below, the volume of Call options has spiked dramatically upward this year to historic levels, indicating extreme greed on the part of investors.

 

And regarding the chart below:  In a recent week, U.S. options traders opened 94.8 million new equity and ETF contracts. The smallest of traders buying Call options accounted for 20.5 million of those. At 21.6% of total volume, that's a record high (above the 1999-2000 dotcom bubble).  Another sign of extreme greed!  

Dare I say it?  It seems like we have reached a stock market state of Euphoria -- an indication that a market top is likely here (or at least very near) and investor caution is advisable.  As Covered Calls investors this would mean increasingly deeper in-the-money Covered Calls positions.  

 

When the volume of Calls in individual stocks spikes much higher than their normal levels and their volume is much higher than their comparable volume of Put options, it is an indication of speculative excess.  This is also accompanied by a substantial increase above the normal range of Implied Volatility for the company.  As Covered Calls investors, one of our investing edges is taking advantage of the volatility risk premium -- the tendency of option premiums to be overpriced currently relative to their realized volatility going forward.  So, we are willing to be the sellers of Call options to these speculative Call buyers -- and Covered Calls can be a relatively conservative means to achieve a good potential return-on-investment in these circumstances.  In short,  we counteract the greed factor apparent in Call buyers by taking the opposite side of the trade -- we are the Call sellers.

Normally, I avoid establishing Covered Calls in highly speculative companies, but I decided to explore the possibility.  I ran a stock screener to identify some large-cap stocks that are extremely highly valued (Price/Sales Ratio > 20) and that also lost money during the last 12 months.  Some of the companies you might have expected to appear on the list were, in fact, there including: CrowdStrike, DocuSign, DoorDash (that IPO'd just yesterday), Draftkings, Pinterest, Teladoc, and Zoom.  

Of these companies, the one I find most compelling is Draftkings (ticker DKNG).  So, I established a small Covered Calls position by purchasing 300 shares at $48.80 and selling 3 $45.00 strike Call options at the January 15th, 2021 expiration date for $6.56 per share.  Not surprisingly, the Call option volumes in Draftkings greatly exceed that of the comparable Put options.  Also, the Implied Volatility of the Call options sold was very high at 72.6 (compare this to the S&P 500 Volatility Index which is currently at 22.1), which provided a very attractive options premium received for the three Call options sold.

As detailed below, the potential return-on-investment result is +6.5% absolute return in 37 days (equivalent to a +64.4% annualized return-on-investment).  

Draftkings Inc. (DKNG) -- New Covered Calls Position

The simultaneous buy/write transaction was as follows:
12/10/2020 Bought 300 shares of Draftkings Inc. stock @ $48.80 per share 
12/10/2020 Sold 3 Draftkings January 15th, 20210 $45.00 Call options @ $6.56 per share
Note: the Delta of these Calls was 68.0, which approximates the probability that the Calls will expire in-the-money at the Jan 15th options expiration. 

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $12,674.01
= ($48.80 - $6.56) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,968.00
= ($6.56 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DKNG stock is above $45.00 strike price at the Jan 15th expiration): -$1,140.00
= ($45.00 - $48.80) * 300 shares

Total Net Profit: +$828.00
= (+$1,968.00 options income +$0.00 dividend income -$1,140.00 capital appreciation)

Absolute Return: +6.5%
= +$828.00/$12,674.01
Equivalent Annualized Return: +64.4%
= (+$828.00/$12,674.01)*(365/37 days)

The downside 'breakeven price' at expiration is at $42.24 ($48.80 - $6.56), which is fully 13.4% below the current market price of $48.80.

Covered Call Position Established in Alphabet Inc.

This morning at 9:35am EST, a new Covered Call buy/write transaction was established in Alphabet Inc. (ticker GOOGL) with a December 18th, 2020 options expiration date. One Alphabet Call option was sold at $55.86 at the $1,700.00 strike price when the stock price was $1,739.59, so the time value in the Call option when the Covered Call transaction was executed was $16.27 per share [$$1,700.00 strike price - ($1,739.59 stock price - $55.86 option price)].  A slightly in-the-money strike price (2.3% downside to the strike price) was chosen because of the Covered Calls Advisor's cautious Overall Market Meter outlook.

As detailed below, the potential return-on-investment result is +1.0% absolute return in 9 days (equivalent to a +39.2% annualized return-on-investment).  

Alphabet Inc.(GOOGL) -- New Covered Call Position

The simultaneous buy/write transaction was as follows:
12/10/2020 Bought 100 shares of Alphabet Inc. stock @ $1,739.59 per share 
12/10/2020 Sold 1 Alphabet Inc. December 18th, 2020 $1,700.00 Call option @ $55.86 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call option was 28.5 and the Open Interest was 1,675 contracts when this transaction was executed. 

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $168,373.67
= ($1,739.59 - $55.86) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$5,586.00
= ($55.86 * 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Alphabet stock is above $1,700.00 strike price at Dec 18th expiration): -$3,959.00
= ($1,700.00 - $1,739.59) * 100 shares

Total Net Profit: +$1,627.00
= (+$5,586.00 options income +$0.00 dividend income -$3,959.00 capital appreciation)

Absolute Return: +1.0%
= +$1,627.00/$168,373.67
Equivalent Annualized Return: +39.2%
= (+$1,627.00/$168,373.67)*(365/9 days)

The downside 'breakeven price' at expiration is at $1,683.73 ($1,739.59 - $55.86), which is 3.2% below the current market price of $1,739.59.

Established Covered Calls in Best Buy Inc.

Today, a Covered Calls position was established in Best Buy Inc. (ticker symbol BBY) with a December 24th, 2020 expiration and at the $100.00 strike price.  Best Buy has a quarterly ex-dividend of $.55 next Monday (Dec. 14th), so the potential return-on-investment results for this position includes the possibility of early exercise since the ex-dividend is prior to the December 24th options expiration date.  

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

• A +1.7% absolute return (equivalent to +102.1% annualized return for the next 6 days) if the stock is assigned early (business day prior to the December 14th ex-div date); OR 
• A +2.2% absolute return (equivalent to +48.0% annualized return over the next 17 days) if the stock is assigned on the December 24th, 2020 options expiration date.

Given the Covered Calls Advisor's current cautious overall market outlook, an in-the-money Covered Calls position was established.  As shown below and as is common when there is an intervening ex-dividend prior to the options expiration date, a Covered Calls positions was established since the potential annualized return-on-investment of +48.0% exceeds the +46.1% of its comparable short Cash-Secured Put options position in this instance:

You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position".  Best Buy does not have a quarterly earnings report prior to the options expiration date.
Also in the chart above is a column called "Intervening Ex-Div" and "YES" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  This means that Best Buy will go ex-dividend sometime between today and the options expiration date and the Covered Calls Advisor's Dividend Capture Strategy spreadsheet should be completed to determine if the pre-determined criteria are met to justify establishing a Covered Calls position for Best Buy. 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 Best Buy position.

Best Buy Inc. (BBY) -- New Covered Calls Position
An ex-dividend occurs on December 14th at $.55 per share.  In the relatively unlikely event that the current time value (i.e. extrinsic value) of $1.65 [$4.70 option premium - ($103.05 stock price - $100.00 strike price)] remaining in the short Call options decays substantially (down to about $.20 or less) by December 11th (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 200 Best Buy shares away to capture the dividend payment.

The transactions were:
12/08/2020 Bought 200 BBY shares @ $103.05
12/08/2020 Sold 2 BBY Dec 24, 2020 $100.00 Call options @ $4.70
Note: the Implied Volatility for these Call options was 31.8 when this simultaneous buy/write transaction was executed.
12/14/2020 Upcoming quarterly ex-dividend of $.55 per share

Two possible overall performance results (including commissions) for this Best Buy Covered Calls position are as follows:
Covered Calls Position Cost Basis: $19,671.34
= ($103.05 stock price - $4.70 options price) *200 shares +$1.34 commissions

Net Profit:
(a) Options Income: +$940.00
= ($4.70 *200 shares)
(b) Dividend Income (If option exercised early on Friday, Dec 11th, the business day prior to ex-div date): +$0.00; or
(b) Dividend Income (If BBY assigned at Dec 14th, 2020 expiration): +$110.00
= ($.55 dividend per share x 200 shares)

(c) Capital Appreciation (If BBY assigned): -$610.00
+($100.00 -$103.05) *200 shares

1. Total Net Profit [If option exercised early]: +$330.00

= (+$940.00 options income +$0.00 dividend income -$610.00 capital appreciation); or

2. Total Net Profit (If Best Buy assigned at $100.00 at expiration): +$440.00

= (+$940.00 options income +$110.00 dividend income -$610.00 capital appreciation)

1. Absolute Return (If option exercised on December 11th, the business day prior to ex-dividend date): +1.7%

= +$330.00/$19,671.34

Annualized Return (If option exercised early -- on Dec 11th): +102.1%

= (+$330.00/$19,671.34)*(365/6 days); or

2. Absolute Return (If BBY assigned at $100.00 on Dec 24th, 2020 expiration date): +2.2%

= +$440.00/$19,671.34

Annualized Return (If BBY assigned at $100.00 on Dec 24th options expiration date): +48.0%

= (+$398.00/$19,713.34)*(365/17 days)

The downside 'breakeven price' at expiration is at $97.80 ($103.05 - $4.70 -$.55), which is 5.1% below the current market price of $103.05. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the December 24th, 2020 options expiration) for this Best Buy Inc. covered calls position is 66.2%, so the expected value annualized ROI of this investment (if held until expiration) is +31.8% (+48.0% * 66.2%), an attractive result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $107.20 ($103.05 + $4.70 -$.55).  This is the price above which it would have been more profitable to simply buy-and-hold Best Buy stock until December 24th, 2020 rather than establishing this Covered Calls position. 

As always, please email me at partlow@cox.net if you have any comments or questions regarding this post or anything related to Covered Calls investing.

Best Wishes and Godspeed,

Jeff