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)
+($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
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.
