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

A Covered Calls position was established early this afternoon in D.R. Horton Inc. (ticker DHI), with a December 11th, 2020 options expiration date.  Four hundred shares of D.R. Horton stock were purchased at $72.26 and two Call options were sold at $3.10 at the $70.00 strike price.  The Delta was 69.8 when this transaction was executed -- a moderately in-the-money position which is consistent with the Covered Calls Advisor's current cautious market outlook.  As preferred, the next earnings report on January 25th, 2021 is after the December 11th, 2020 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 good exposure to the critically important entry-level buyers, lowest debt leverage, and least on-balance sheet land risk.  The future is bright for the housing industry which is in an especially strong position at present.  The current U.S. demand for new houses is at an all-time high (since statistics began to be captured in 1953) relative to the currently available inventory of only 3.3 months.  D.R. Horton was originally identified by the Covered Calls Advisor when it recently appeared in the top 2% of companies identified by my Acquirers Multiple stock screener, a good indication of its current relative valuation.

There is an ex-dividend date this Thursday (12/03) of $.20 per share (1.1% annual dividend yield), so capturing this dividend is included in the potential return-on-investment result detailed below.  The time value obtained when this position was established was $.84 per share [$3.10 Call options premium - ($72.26 stock price - $70.00 strike price)].       

As detailed below, a potential return-on-investment result if this position closes in-the-money at the December 11th options expiration date is +1.5% absolute return in 11 days (equivalent to a +49.9% annualized return-on-investment).  

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

The buy/write transaction was executed 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

A possible overall performance result (including commissions) would be 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 (If DHI stock price is above $70.00 strike price at the Dec 11th options expiration date): -$904.00
= ($70.00 -$72.26) * 400 shares

Total Net Profit: +$416.00
= (+$1,240.00 options income +$80.00 dividend income -$904.00 capital appreciation)

Absolute Return: +1.5%
= +$416.00/$27,666.68

Equivalent Annualized Return: +49.9%
= (+$416.00/$27,666.68)*(365/11 days)

These returns will be achieved if the D.R. Horton stock is above the $70.00 strike price at the market closing on the December 11th, 2020 options expiration date.  If the stock declines below the strike price, the breakeven price of $68.96 ($72.26 -$3.10 -$.20) provides 4.6% downside breakeven protection below today's stock purchase price.

Best Wishes and Godspeed,

Jeff Partlow