Today a Covered Calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) when the Covered Calls Advisor's buy/write limit order at $142.84 executed. At 10:48am, with the Dow Jones down 645 points, 200 shares were purchased at $152.37 and two January 21st, 2022 $145.00 Call options were sold at $9.53 per share. This is the first position established in the Covered Calls Advisor Portfolio with a January 2022 options expiration date. This is a moderately in-the-money position since the stock purchase price is 5.1% above
the $145.00 strike price. This corresponds to a Delta of 71.7 which provides a good approximation of 71.7% for the probability of assignment on the options expiration date.
Most companies in the Financial Sector provide only modest growth prospects, but they often provide good annual dividend yields. Consequently, the Covered Calls Advisor targets opportunities to use the Dividend Capture Strategy in all Financial Sector Covered Calls positions. This new January 21st, 2022 JPMorgan Chase Covered Calls position continues the Dividend Capture Strategy of often selling
in-the-money monthly Covered Calls for one of five very large U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley) for each options expiration
month:
(JPMorgan Chase quarterly for Jan, Apr, July, and Oct options expirations;
Citigroup and/or Morgan Stanley for Feb, May, Aug, and Nov options expirations; and
Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec options expirations).
The goal of these monthly Covered Calls in these banks is to both provide an opportunity to either: (1) potentially capture the quarterly dividend payment and if the stock price remains above the strike price at
options expiration, the maximum possible return-on-investment result on the options expiration date for the position would be achieved; or (2) have the stock assigned early on the day prior to the ex-dividend date in which case the Covered Calls Advisor is usually very pleased since the Dividend Capture Strategy criteria are designed such that most often the annualized return-on-investment for early assignment is greater than that would be achieved if the stock was instead assigned on the options expiration date. So far, applying this approach has provided attractive annualized return results -- much better than would be achieved
if Covered Calls positions for these bank stocks were held in the Covered Calls Advisor Portfolio during the other two non-dividend paying months each quarter.
JPMorgan's upcoming dividend is $1.00 per share (a 2.6% annualized dividend yield) and it goes ex-dividend on January 5th, 2022. Two potential return-on-investment results for this position are: (1) early assignment on the day prior to a January 5th ex-dividend date; and (2) assignment (if the stock price is in-the-money) on the January 21st, 2022 options expiration date. An additional consideration for this position is that the next quarterly earnings report is on January 14th which is prior to the January 21st options expiration date. Prior to the earnings report, the Covered Calls Advisor will be monitoring this position closely each day since closing out the position on or after the ex-dividend date but prior to the earnings date is a likely possibility.
As detailed below, two potential return-on-investment results are:
- +1.5% absolute return (equivalent to +34.4% annualized
return for the next 16 days) if the stock is assigned early (business day
prior to a January 5th, 2022 ex-dividend date); OR
- +2.2%
absolute return (equivalent to +24.4% annualized return over the next 33
days) if the stock is assigned on the January 21st, 2022 options expiration date.
JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
If the stock price increases to the point where the
current time value (i.e. extrinsic value) of $2.16 = [$9.53 options premium -
($152.37 stock price - $145.00 strike price)] remaining in the short Call
options decays substantially (down to about $.25 or less) by January 4th, 2022 (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 JPM shares away to capture the dividend payment. As detailed in the Dividend Capture spreadsheet below, early assignment would be a desirable outcome since its +34.4% annualized return-on-investment (aroi) exceeds the +24.4% aroi if it is instead assigned on the January 21st, 2022 options expiration date.
The simultaneous buy/write transaction was:
12/20/2021 Bought 200 JPM shares @ $152.37
12/20/2021 Sold 2 JPM 1/21/2022 $145.00 Call options @ $9.53 per share
1/05/2022 Upcoming quarterly ex-dividend at $1.00 per share
Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost: $28,569.34
= ($152.37 - $9.53) *200 shares + $1.34 commission
Net Profit:
(a) Options Income: +$1,904.66
= ($9.53 *200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on Jan.4th, the business day prior to the Jan. 5th ex-div date): +$0.00;
or
(b) Dividend Income (If JPM assigned at the January 21st, 2022 expiration): +$200.00
= ($1.00 dividend per share x 200 shares)
(c) Capital Appreciation (If JPM assigned early): -$1,474.00
+($145.00 -$152.37) * 200 shares; or
(c) Capital Appreciation (If JPM assigned at $145.00 strike price at expiration): -$1,474.00
+($145.00-$152.37) * 200 shares
1. Total Net Profit [If option exercised on the last business day prior to the Jan. 5th ex-dividend date)]: +$430.66
= (+$1,904.66 options income +$0.00 dividend income -$1,474.00 capital appreciation); or
2. Total Net Profit (If JPM assigned at $145.00 at Jan. 21st, 2022 expiration): +$630.66
= (+$1,904.66 options income +$200.00 dividend income -$1,474.00 capital appreciation)
1. Absolute Return (If option exercised on business day prior to ex-dividend date): +1.5%
= +$430.66/$28,569.34
Annualized Return (If option exercised early): +34.4%
= (+$430.66/$28,569.34/$28,569.34)*(365/16 days); or
2. Absolute Return (If JPM assigned at $145.00 at Jan. 21st, 2022 expiration date): +2.2%
= +$630.66/$28,569.34
Annualized Return (If JPM assigned at $145.00 at Jan. 21st, 2022 options expiration): +24.4%
= (+$630.66/$28,569.34)*(365/33 days)
Either
outcome provides a good annualized-return-on-investment result for this
investment. These returns will be achieved as long as the stock is
above the $145.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $141.84 ($152.37 -$9.53 -$1.00)
provides 6.9% downside protection below today's 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. Eight of the nine criteria are achieved in this JPMorgan position.
