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.