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.
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)
+($100.00 -$103.05) *200 shares
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
