January 29th, 2021 Options Expiration -- Lowe's Companies Inc. Covered Calls Position Assigned

The January 29th, 2021 $165.00 strike Covered Calls position in Lowe's (ticker LOW) expired in-the-money, so the 200 shares of Lowe's stock were assigned (i.e. sold) at the $165.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +1.3% absolute return (equivalent to +27.3% annualized return-on-investment for the 17 days holding period).

Lowe's Companies Inc. (LOW) -- New Covered Calls Position
The buy/write transaction was:
01/13/2021 Bought 200 Lowe's Companies Inc. shares @ $169.86
01/13/2021 Sold 2 Lowe's 01/29/2021 $165.00 Call options @ $6.34
Note: Implied Volatility (IV) of the Call options was at 22.8 when this position was transacted.   
01/19/2021 Quarterly ex-dividend of $.60 per share
01/29/2021 Today's $165.00 Call options expired in-the-money (stock closed at $166.85 per share), so the 200 LOW shares were assigned (i.e. sold) at the $165.00 strike price.

The overall performance result (including commissions) for this Lowe's Companies Inc. Covered Calls position was as follows:
Covered Calls Cost Basis: $32,705.34
= ($169.86 - $6.34) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,268.00
= ($6.34 * 200 shares)
(b) Dividend Income (Lowe's stock assigned at Jan. 29th, 2021 options expiration): +$120.00
= ($.60 dividend per share x 200 shares)
(c) Capital Appreciation (200 shares assigned at $165.00 strike price at options expiration): -$972.00
+($165.00 - $169.86) * 200 shares Total Net Profit (Lowe's shares assigned at $165.00 at January 29th, 2021 expiration): +$416.00
= (+$1,268.00 +$120.00 -$972.00)

Total Net Profit (Lowe's shares assigned at $165.00 strike price at January 29th, 2021 expiration): +$416.00

= (+$1,268.00 options income +$120.00 dividend income -$972.00 capital appreciation)
 

Absolute Return (Lowe's shares assigned on Jan. 29th options expiration date): +1.3%

= +$416.00/$32,705.34

Annualized Return: +27.3%

= (+$416.00/$32,705.34)*(365/17 days)

Established Covered Calls in Micron Technology Inc.

This morning a new Covered Calls position was established in Micron Technology Inc. (ticker MU) with a February 19th, 2021 options expiration date.   A buy/write transaction entered at a net debit of $70.46 was executed at 10:00 a.m. by purchasing 200 shares of Micron at $76.0865 and simultaneously selling two February 19th, 2021 Call options at the $72.50 strike price at $5.63 per share. The time value when this Covered Calls position was established was $2.0435 per share = [$5.63 Call options price - ($76.0865 stock price - $72.50 strike price)].  Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established.  The Delta was 69.6 which approximates a probability of 69.6% that the Call options will be in-the-money and therefore the stock assigned (i.e. sold) on the options expiration date. The Implied Volatility of these Calls was 44.3 today when this transaction was executed.

Micron's Q1 2021 earnings report was 3 weeks ago.  Despite the excellent results, Micron's stock price is now slightly below where it was after that announcement.  Their future is bright since they are strong in key growth areas of SSDs, Cloud, Smartphones, Graphics/Game, and 5G with their mix of 2/3 DRAM and 1/3 NAND chips.  Their 3-year CEO, Sanjay Mehrotra, is a brilliant chips engineer who has over 70 patents and co-founded SanDisk.  On the earnings conference call, he was confident and visionary in describing Micron's future diversification projects and the company's focus on developing "higher margin" products.  The semiconductor industry is constantly changing and highly competitive.  Micron's commitment to a Research and Development-to-Revenue ratio of 13% will help them to advance in their objective of improving their technological designs for new, cutting-edge semiconductor chips.  

Micron's finances are strong and they are also very highly rated by analysts.  Reuters Research indicates that currently 30 analysts have a Buy or Outperform rating on the stock, 5 have a Hold, and none have an Underperform or Strong Sell; and their average target price is $95.18 (+23.8% above the current price).  

As detailed below, the potential return-on-investment result is +2.9% absolute return in 24 days (equivalent to a +44.1% annualized return-on-investment).  

Micron Technology Inc. (MU) -- New Covered Calls Position

The Buy/Write transaction was as follows:
01/27/2021 Bought 200 shares of Micron Technology Inc. stock @ $76.0865 per share 
01/27/2021 Sold 2 Micron Feb. 19th, 2021 $72.50 Call options @ $5.63 per share

A possible overall performance result (including commissions) if the stock price is above the $72.50 strike price at expiration would be as follows:
Covered Call Cost Basis: $14,092.64
= ($76.0865 - $5.63) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,126.00
= ($5.63 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Micron stock is above $72.50 strike price at the February 19th, 2021 options expiration): -$717.30
= ($72.50 - $76.0865) * 200 shares

Total Net Profit: +$408.70
= (+$1,126.00 options income +$0.00 dividend income -$717.30 capital appreciation)

Absolute Return: +2.9%
= +$408.70/$14,092.64
Equivalent Annualized Return: +44.1%
= (+$408.70/$14,092.64)*(365/24 days)

The downside 'breakeven price' at expiration is at $70.4565 ($76.0865 - $5.63), which is 8.0% below the current market price of $76.0865.

Established Covered Calls in KB Home

Today a new Covered Calls position was established in KB Home (ticker KBH) with a February 19th, 2021 options expiration date.  A buy/write transaction was made with 300 shares purchased at $41.34 and three Calls sold at the $38.00 strike price for $4.08 per share. Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established.  The Delta was 75.8 and this approximates a probability of 75.8% that the Call options will be in-the-money and therefore the stock assigned on the options expiration date. Two potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the February 3rd, 2021 ex-dividend is prior to the February 19th options expiration date.

KB Home is a home builder with high exposure to entry-level built-to-order homes, a good niche in the current market environment.  In this regard, there are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently very positive for homebuilders. In terms of demographics, ages 26-32 are the prime ages for first-time buyers and years 2020 to 2025 will see the largest number of young adults in this age category in U.S. history. In terms of interest rates, 10-year Treasury rates below 2.0% provides attractive, affordable financing for new buyers. The current rate is only 1.04% and mortgage credit is readily available. Finally, the most recent monthly reading of current supply of houses is only 4.1 months which is close to the all-time low (since 1963 when data was first measured) of 3.5 months.  Historically, supply conditions remain attractive to builders until this inventory factor exceeds 7.0 months.  Also in this regard, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100).  This month's index is 83 -- also near an all-time high (since 1985) of 90 (Note: The lowest rating of 8 was in January 2009).  So we are definitely now in a strong "sellers' market".  The Covered Calls Advisor will continue to track these factors and will likely remain invested in monthly Covered Calls in companies in this industry as long as all three of these conditions remain positive.

Despite the pandemic, the most recent fiscal year's (2020) earnings exceeded 2019, and 2021 revenues are estimated to increase by 40% above 2020; and earnings by even more (+65%).  Another positive feature is the location of KB Home's markets -- almost half are in California and the remainder are in other states throughout the Sunbelt.    

The 47.1 Implied Volatility for these KB Home Call options was very attractive to the Covered Calls Advisor since it is more than twice the current S&P 500 Volatility Index (VIX) of 23.2.  In addition, five analysts have raised their price target estimates since KBH announced their 4th quarter earnings on January 12th, 2021.  The average target price of the 16 analysts covering KBH is now $44.08.  

As detailed below, two potential return-on-investment results are: 

•  +2.0% absolute return (equivalent to +90.6% annualized return for the next 8 days) if the stock is assigned early (business day prior to the February 2nd ex-dividend date); OR 

• +2.4% absolute return (equivalent to +34.9% annualized return over the next 25 days) if the stock is assigned on the February 19th options expiration date.

 

KB Home (KBH) -- New Covered Calls Position
The Buy/Write transaction today was as follows:
01/26/2021 Bought 300 KB Home shares @ $41.34
01/26/2021 Sold 3 KB Home 02/19/2021 $38.00 Call options @ $4.08
Note: the Time Value (aka Extrinsic Value) in the Call options was $.74 per share = [$4.08 Call options premium - ($41.34 stock price - $38.00 strike price)]
02/03/2021 Upcoming quarterly ex-dividend of $.15 per share

Two possible overall performance results (including commissions) for this KB Home Covered Calls position are as follows:
Covered Calls Cost Basis: $11,180.01
= ($41.34 - $4.08) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,224.00
= ($4.08 * 300 shares)
(b) Dividend Income (If option exercised early on February 2nd, the business day prior to the Feb. 3rd ex-div date): +$0.00; or
(b) Dividend Income (If KB Home stock assigned at Feb. 19th, 2021 expiration): +$45.00
= ($.15 dividend per share x 300 shares)

(c) Capital Appreciation (If KB Home Call options assigned early on Feb 2nd): -$1,002.00
+($38.00 - $41.34) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $38.00 strike price at options expiration): -$1,002.00
+($38.00 - $41.34) * 300 shares

1. Total Net Profit [If option exercised on Feb. 2nd (business day prior to Feb. 3rd ex-dividend date)]: +$222.00

= (+$1,224.00 options income +$0.00 dividend income -$1,002.00 capital appreciation); or

2. Total Net Profit (If KB Home shares assigned at $38.00 strike price at February 19th, 2021 expiration): +$267.00

= (+$1,224.00 +$45.00 -$1,002.00)

1. Absolute Return (If option exercised early on Feb. 2nd): +2.0%

= +$222.00/$11,180.01

Annualized Return (If option exercised early): +90.6%

= (+$222.00/$11,180.01)*(365/8 days); or

2. Absolute Return (If KB Home shares assigned at $38.00 at Feb 19th, 2021 options expiration): +2.4%

= +$267.00/$11,180.01

Annualized Return (If KB Home shares assigned at $38.00 at Feb 19th, 2021 expiration): +34.9%

= (+$267.00/$11,180.01)*(365/25 days)

Either outcome would provide a very attractive return-on-investment result for this KB Home investment.  These returns will be achieved as long as the stock is above the $38.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $37.11 ($41.34 -$4.08 -$.15) provides 10.2% 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 must be 'YES' prior to establishing a position.  As shown below with this KB Home position, eight criteria were met.

Established Covered Calls Position in Citizens Financial Group Inc. Using the Dividend Capture Strategy

Today a Covered Calls position was established in Citizens Financial Group Inc.(ticker symbol CFG) when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $36.99 and 4 February 19th, 2021 Call options were sold at $2.45 per share at the $35.00 strike price.  There is an upcoming ex-dividend on February 2nd, 2021 of $.39 per share -- a generous 4.2% annual dividend yield at the current stock price. Also important to the Covered Calls Advisor, Citizens Financial reported their 4th quarter 2020 earnings per share last week so there will not be any earnings report surprises prior to the Feb. 19th options expiration date. These reported earnings beat analysts' estimates by 8.7% and I was also encouraged by their Board's buyback authorization representing 4.5% of their current outstanding shares.

Two potential return-on-investment results for this position are detailed below including the possibility of early exercise since the ex-dividend is prior to the February 19th, 2021 options expiration date.  Given the Covered Calls Advisor's current Overall Market Meter outlook, a conservative in-the-money Covered Calls position was established -- the Delta was 72.6, which approximates the probability that the Call options will be in-the-money on the options expiration date. 

As detailed below, two potential return-on-investment results are: 

•  +1.3% absolute return (equivalent to +60.8% annualized return for the next 8 days) if the stock is assigned early (business day prior to the February 2nd ex-dividend date); OR 

• +2.5% absolute return (equivalent to +34.5% annualized return over the next 26 days) if the stock is assigned on the February 19th options expiration date.

Citizens Financial Group Inc. (CFG) -- New Covered Calls Position
The buy/write transaction was:

01/25/2021 Bought 400 Citizens Financial shares @ $36.99
01/25/2021 Sold 4 Citizens Financial 02/19/2021 $35.00 Call options @ $2.45
Note: the Time Value (aka Extrinsic Value) in the Call options was $.46 per share = [$2.45 Call options premium - ($36.99 stock price - $35.00 strike price)]
02/02/2021 Upcoming quarterly ex-dividend of $.39 per share

Two possible overall performance results (including commissions) for this Citizens Financial Covered Calls position are as follows:
Covered Calls Cost Basis: $13,818.68
= ($36.99 - $2.45) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$980.00
= ($2.45 * 400 shares)
(b) Dividend Income (If option exercised early on February 1st, the business day prior to the Feb. 2nd ex-div date): +$0.00; or
(b) Dividend Income (If Citizens Financial stock assigned at Feb. 19th, 2021 expiration): +$156.00
= ($.39 dividend per share x 400 shares)

(c) Capital Appreciation (If Citizens Financial Call options assigned early on Feb. 1st): -$796.00
+($35.00 - $36.99) * 400 shares; or
(c) Capital Appreciation (If CFG shares assigned at $35.00 strike price at options expiration): -$796.00
+($35.00 - $36.99) * 400 shares

1. Total Net Profit [If option exercised on Feb. 1st (business day prior to Feb 2nd ex-dividend date)]: +$184.00

= (+$980.00 options income +$0.00 dividend income -$796.00 capital appreciation); or

2. Total Net Profit (If Citizens Financial shares assigned at $35.00 strike price at February 19th, 2021 options expiration): +$340.00

= (+$980.00 +$156.00 -$796.00)

1. Absolute Return (If option exercised early on Feb. 1st): +1.3%

= +$184.00/$13,818.68

Annualized Return (If option exercised early): +60.8%

= (+$184.00/$13,818.68)*(365/8 days); or

2. Absolute Return (If Citizens Financial shares assigned at $35.00 at Feb 19th, 2021 options expiration): +2.5%

= +$340.00/$13,818.68

Annualized Return (If Citizens Financial shares assigned at $35.00 at Feb 19th, 2021 expiration): +34.5%

= (+$340.00/$13,818.68)*(365/26 days)

Either outcome would provide a very attractive return-on-investment result for this Citizens Financial investment.  These returns will be achieved as long as the stock is above the $35.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $34.15 ($36.99 -$2.45 -$.39) provides a substantial 7.7% 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 must be 'YES' prior to establishing a position.  As shown below for this Citizens Financial position, all nine criteria were met.

Established Covered Calls Position in Morgan Stanley Using the Dividend Capture Strategy

Today a Covered Calls position was established in Morgan Stanley (ticker symbol MS) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $74.49 and 2 February 5th, 2021 Call options were sold at $2.41 per share at the $73.00 strike price. This position is very similar to the Morgan Stanley position established 3 months ago that was assigned on the options expiration date for a +43.4% annualized return-on-investment. See prior MS position here: link. 

Morgan Stanley reported their earnings per share yesterday and beat the same quarter last year by 47.6% and analysts' estimates by 51.3%.  Since yesterday's earnings report, at least 7 investment companies have increased their target prices for Morgan Stanley and none have cut their target price.  As part of their earnings report yesterday, they also declared an upcoming ex-dividend of $.35 per share (a 1.9% annual dividend yield) on January 28th.  Two potential return-on-investment results for this position are detailed below including the possibility of early exercise since the ex-dividend is prior to the February 5th, 2021 options expiration date.  Given the Covered Calls Advisor's current Overall Market Meter outlook, a conservative in-the-money Covered Calls position was established -- the Delta was 65.0, which approximates the probability that the Call options will be in-the-money on the options expiration date. 

As detailed below, two potential return-on-investment results are: 

•  +1.3% absolute return (equivalent to +58.2% annualized return for the next 8 days) if the stock is assigned early (business day prior to the February 5th ex-dividend date); OR 

• +1.8% absolute return (equivalent to +40.2% annualized return over the next 16 days) if the stock is assigned on the February 5th options expiration date.

We are very early in the earnings reporting season and the Covered Calls Advisor intends to establish additional positions, but will do so gradually.  I will continue watching earnings releases closely each day during the next several weeks and will limit establishing new positions primarily to companies that have reported their quarterly earnings (as was the case with this Morgan Stanley position) and therefore have no intervening earnings report prior to the February options expiration dates.   

Morgan Stanley (MS) -- New Covered Calls Position
The buy/write transaction was:
01/21/2021 Bought 200 Morgan Stanley shares @ $74.49
01/21/2021 Sold 2 Morgan Stanley 02/05/2021 $73.00 Call options @ $2.41
Note: the Time Value (aka Extrinsic Value) in the Call options was $.92 per share = [$2.41 Call options premium - ($74.49 stock price - $73.00 strike price)]
01/28/2021 Upcoming quarterly ex-dividend of $.35 per share

Two possible overall performance results (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $14,417.34
= ($74.49 - $2.41) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$482.00
= ($2.41 * 200 shares)
(b) Dividend Income (If option exercised early on January 27th, the business day prior to the Jan. 28th ex-div date): +$0.00; or
(b) Dividend Income (If Morgan Stanley stock assigned at Feb. 5th, 2021 expiration): +$70.00
= ($.35 dividend per share x 200 shares)

(c) Capital Appreciation (If Morgan Stanley Call options assigned early on Jan. 27th): -$298.00
+($73.00 - $74.49) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $73.00 strike price at options expiration): -$298.00
+($73.00 - $74.49) * 200 shares

1. Total Net Profit [If option exercised on Jan. 27th (business day prior to Jan. 28th ex-dividend date)]: +$184.00

= (+$482.00 options income +$0.00 dividend income -$298.00 capital appreciation); or

2. Total Net Profit (If Morgan Stanley shares assigned at $73.00 strike price at February 5th, 2021 expiration): +$254.00

= (+$482.00 +$70.00 -$298.00)

1. Absolute Return (If option exercised early on Jan 27th): +1.3%

= +$184.00/$14,417.34

Annualized Return (If option exercised early): +58.2%

= (+$184.00/$14,417.34)*(365/8 days); or

2. Absolute Return (If Morgan Stanley shares assigned at $73.00 at Feb 5th, 2021 options expiration): +1.8%

= +$254.00/$14,417.34

Annualized Return (If Morgan Stanley shares assigned at $73.00 at Feb 5th, 2021 expiration): +40.2%

= (+$254.00/$14,417.34)*(365/16 days)

Either outcome would provide a very attractive return-on-investment result for this Morgan Stanley investment.  These returns will be achieved as long as the stock is above the $73.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $71.73 ($74.49 -$2.41 -$.35) provides 3.7% 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 must be 'YES' prior to establishing a position.  As shown below with this Morgan Stanley position, all nine criteria were met.

Roll Up-and-Out Lennar Corp. Covered Calls

When Lennar Corp. (ticker symbol LEN) shares were trading at $83.58 this afternoon and the existing Covered Calls position of January 29th, 2021 at the $72.50 strike price, the two Call options were bought-to-close at $11.18 per share.  They were relatively deep-in-the-money and had only $.10 time value remaining [$11.18 options price - ($83.58 stock price - $72.50 strike price)], so the Covered Calls Advisor decided to roll-up-and-out to the February 19th, 2021 $77.50 Calls at $7.50 per share.   This remains a moderately conservative in-the-money position since the Delta for these new Calls when this rollout transaction was executed was 75.3 which closely approximates the probability of assignment at options expiration (i.e. 75.3% probability).  The transaction history and two potential return-on-investment results for this Lennar Corp. Covered Calls position are detailed below.  There is an ex-dividend on January 28th of $.25 per share which is included in the calculations below. As preferred by the Covered Calls Advisor, there is no quarterly earnings report for Lennar prior to the February 19th, 2021 options expiration date.

As detailed below, two potential return-on-investment results for this Lennar Corp position are: (1) +3.3% absolute return in 15 days (equivalent to a +81.0% annualized return-on-investment) if assigned early on January 27th (the day prior to the Jan. 28th ex-dividend date); or (2) +3.7% absolute return in 38 days (equivalent to a +35.3% annualized return-on-investment) if the stock closes above the $77.50 strike price at expiration.

Lennar Corp. (LEN) -- Continuation of Covered Calls Position
The buy/write transaction was:
01/13/2021 Bought 200 Lennar Corp. shares @ $76.39
01/13/2021 Sold 2 LEN 01/29/2021 $72.50 Call options @ $4.96
Note: the Implied Volatility of the Call options was 37.5 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 73.3.
01/20/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 LEN Jan. 29th, 2021 $72.50 Call options at $11.18 per share and simultaneously Sold-to-Open 2 LEN February 19th, 2021 $77.50 Calls at $7.50 per share. This roll-up-and-out transaction occurred at a net debit of $3.68 ($11.18 - $7.50) per share and the price of Lennar's stock was $83.58 when this transaction was executed.
01/28/2021 Upcoming quarterly ex-dividend of $.25 per share

Two possible overall performance results (including commissions) for this Lennar Corp. Covered Calls position are as follows:
Covered Calls Cost Basis: $14,287.34
= ($76.39 - $4.96) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$253.32
= ($4.96 -$11.18 + $7.50 ) * 200 shares - $2.68 commissions
(b) Dividend Income (If option exercised early on January 27th, 2021 the business day prior to the Jan. 28th ex-div date): +$0.00; or
(b) Dividend Income (If Lennar stock assigned at the February 19th, 2021 options expiration): +$50.00
= ($.25 dividend per share x 200 shares)

(c) Capital Appreciation (If LEN Call option assigned early on Jan. 27th): +222.00
+($77.50 - $76.39) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $77.50 strike price at options expiration): +222.00
+($77.50 - $76.39) * 200 shares

1. Total Net Profit [If option exercised on Jan. 27th (business day prior to Jan. 28th, 2021 ex-dividend date)]: +$475.32

= (+$253.32 options income +$0.00 dividend income +$222.00 capital appreciation); or

2. Total Net Profit (If LEN shares assigned at $77.50 at Feb. 19th, 2021 expiration): +$525.32

= (+$253.32 +$50.00 +$222.00)

1. Absolute Return [If option exercised on business day prior to the Jan. 28th ex-dividend date]: +3.3%

= +$475.32/$14,287.34

Annualized Return-on-Investment (If option exercised early): +81.0%

= (+$475.32/$14,287.34)*(365/15 days); or

2. Absolute Return (If Lennar shares assigned on Feb. 19th options expiration date): +3.7%

= +$525.32/$14,287.34

Annualized Return-on-Investment (If LEN shares assigned at $77.50 at February 19th, 2021 expiration): +35.3%

= (+$525.32/$14,287.34)*(365/38 days)

Future Stock Market Return Forecasts

Since we are now entering a new decade, I wanted to share some recent readings and charts related to "Future Stock Market Return Forecasts". 

First, here's a big picture view of long-term historic average annualized returns in the U.S. Stock Market (S&P 500) from Ben Carlson's "A Wealth of Common Sense" blog:

Above we see that long periods of double-digit annualized returns are followed by shorter periods (from 8 to 13 years) of low single digit or even slightly negative returns. As we know, the last decade was a very profitable one with an average annualized roi above 14%. So what will the upcoming decade of the 2020s bring? -- a continuation of bullish double-digit returns or a reversion to a period of low, stagnant returns?

To address this question, I'll share forecasts I've encountered in my readings during the past several days from three well-respected sources. But first, let me share a caveat. Forecasts about anything in the future are dubious at best and stock market forecasts are certainly no exception. Nevertheless, I've found these resources below to be better than most; so, for whatever it's worth, I'm sharing them with you along with my own thoughts.

I look forward to reading the quarterly Guide to the Markets from JPMorgan. The most recent version was recently issued for the 1st Quarter of 2021 and included this chart showing S&P 500 Forward P/E and subsequent 1-Year and also 5-Year Return estimates. As of December 31st, 2020, their forward 1-Year expected return is about +1% and their 5-Year return around -1%.

In addition to these JPMorgan one-year and five-year forecasts, below are two 10-year forecasts.  The first is from Meb Faber Research which states:  You know two of the starting variables (dividend yield and starting 10-year PE CAPE valuation), you don’t know the other three (future inflation, future real earnings growth, and ending valuation.).  But historically, you can come up with a matrix to give you a good idea of where we might be going. And in most cases, it isn’t pretty. I think the base case for US stocks is about 0% to 2% real returns for a decade.

The second 10-year forecast (shown below) is from the Research Affiliates interactive Asset Allocation Model. Their model is even slightly more sobering since they expect real returns for U.S. Large Cap stocks to approximate -0.2% per year on average over the next 10 years. They expect U.S. Small Caps to perform somewhat better at +2.8% annualized, but International stocks to outperform both U.S. categories -- EAFE (Europe, Australasia and the Far East) stocks at +4.1% and the best performing category is Emerging Markets at +5.7%.

You might agree or disagree with the conclusions implied by these charts -- I'm sure there are other analysts and resources that are providing arguments for a continuation of the past decade's bull market during the next decade. What is your opinion? I like this quote from Steve Jobs concerning opinions: "Don’t let the noise of others’ opinions drown out your own inner voice." My own inner voice is saying that the charts above are likely to be reasonably close to the truth. But I'm open to considering other informed viewpoints. What is your inner voice telling you?

So, what do we investors do during an expected period of a relatively stagnant stock market? I have some good news for you. A stagnant market is an ideal time for us Covered Calls investors to outperform the stock market by a significant percentage. Whereas in a bull market, we can expect an informed and disciplined Covered Calls investing strategy to outperform the S&P 500 benchmark by about 3 to 5% on an annualized return-on-investment basis, an even greater annualized roi outperformance relative to the S&P 500 is likely in stagnant markets. As the Covered Calls Advisor, my current plan is (as was the case during 2020) to continue investing primarily via in-the-money Covered Calls. But remember, Job #1 for us Covered Calls investors is good stock selection. So, I will continue to use my Company Checklist to identify investment-worthy QVG (quality, value, and growth) companies -- companies in quality businesses, with quality management, good valuations, and good growth prospects. For those companies that pay dividends, I will use my Dividend Capture Strategy worksheet to see if the company meets my criteria; and if it does, then also use it to guide the timing of my entry into the Covered Calls position. I will also check for the upcoming earnings reporting date for each company under consideration, and because of the elevated uncertainty associated with the normally significant stock price reactions to earnings news, I will consistently avoid being invested on the day of any company's earnings report.  

I would appreciate receiving any comments (pro or con) or questions you might have on this article.

Best Wishes and Godspeed,
Jeff
partlow@cox.net

January 15th, 2021 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had eleven positions since last month's (December 18th, 2020) monthly options expiration date.  The Covered Calls Advisor is pleased that all eleven positions were closed out profitably.  The results of these eleven positions were:

• Four Covered Call positions expired in-the-money on the January 15th, 2021 monthly options expiration date and the stocks were assigned (i.e. sold) at their strike prices with the following results:

1. Anthem Inc.: 100 ANTM shares assigned at the $290.00 strike price for a +2.3% absolute return in 26 days (equivalent to +32.3% annualized return-on-investment).
2. Cisco Systems Inc.: 400 CSCO shares assigned at the $43.50 strike price for a +1.3% absolute return in 17 days (equivalent to +28.3% annualized return-on-investment).
3. Energy Sector Select SPDR Fund ETF: 300 XLE shares assigned at the $38.00 strike price for a +3.2% absolute return in 30 days (equivalent to +38.4% annualized return-on-investment).
4. FMC Corporation: 100 FMC share assigned at the $110.00 strike price for a +1.5% absolute return in 19 days (equivalent to +28.9% annualized return-on-investment).
   
   

• Four Covered Call positions expired in-the-money on their weekly options expiration dates -- after last month's December 18th expiration date but prior to this month's January 15th, 2021 monthly options expiration date.  The stocks were assigned (i.e. sold) at their strike prices with the following results:

1. Best Buy Inc.: 200 BBY shares assigned on their Dec. 24th, 2020 options expiration date at the $100.00 strike price for a +2.2% absolute return in 17 days (equivalent to +48.0% annualized return-on-investment).
2. D.R. Horton Inc.: 200 DHI shares assigned on their Dec. 31st, 2020 options expiration date at the $67.50 strike price for a +1.4% absolute return in 16 days (equivalent to +32.2% annualized return-on-investment).
3. Facebook Inc.: 100 FB shares assigned on their Dec. 31st, 2020 options expiration date at the $255.00 strike price for a +0.9% absolute return in 11 days (equivalent to +29.7% annualized return-on-investment).
4. Lincoln National Corporation: 300 LNC shares assigned on their January 8th, 2021 options expiration date at the $45.00 strike price for a +2.8% absolute return in 21 days (equivalent to +48.4% annualized return-on-investment).
   
   

• Two Covered Call positions were closed by early assignment on December 31st, 2020 (the last trading day prior to their ex-dividend date) so the stocks were assigned (i.e. sold) at their strike prices with the following results:

1. Bristol-Myers Squibb Co.: 300 BMY shares assigned early on Dec. 31st, 2020 at the $57.50 strike price for a +1.1% absolute return in 17 days (equivalent to +22.6% annualized return-on-investment).
2. Cardinal Health Inc.: 200 CAH shares assigned early on Dec. 31st, 2020 at the $50.00 strike price for a +0.8% absolute return in 9 days (equivalent to +31.1% annualized return-on-investment).

 

• One Covered Call position in JPMorgan Chase & Co. was closed early by the Covered Calls Advisor on January 6th, 2021.  2 JPM 1/15/2021 $120.00 Calls were bought-to-close and 200 shares were simultaneously sold-to-close out the position to avoid the uncertainty of a subsequent quarterly earnings to be reported prior to the options expiration.   A +0.9% absolute return in 7 days (equivalent to +47.5% annualized return-on-investment) was achieved for this position.
  

 

In addition to these eleven Covered Calls positions closed out during this past options expiration month, three additional Covered Calls positions were maintained by rolling out to later options expiration dates.  These positions were in GoHealth Inc., Draftkings Inc., and Alibaba Group Holdings Ltd.  These transactions and potential results were detailed in a blog post yesterday when the transactions occurred -- the blog post is available here: link.  

All current holdings in the Covered Calls Advisor Portfolio are shown in the right sidebar of this blog.  As always, any future transactions and return-on-investment results will be posted on this blog site on the same day the transactions occur. 

Best Wishes,

Jeff

Rollout of GoHealth Inc., Draftkings Inc., and Alibaba Group Holdings Ltd. Covered Calls Positions

Today is the January 2021 monthly options expiration date.  Around 3:00pm today, the Covered Calls Advisor decided to rollout three existing in-the-money Covered Calls positions -- GoHealth Inc. (ticker GOCO), Draftkings Inc. (DKNG), and Alibaba Group Holdings (BABA).  The GoHealth position was rolled out at the same $15.00 strike price to the February 19th, 2021 options expiration date.  The Draftkings position was rolled-up-and-out from the $45.00 strike price to the $50.00 strike price and to the February 5th, 2021 expiration date.  The Alibaba position was rolled-up-and-out from the $240.00 strike price to the $245.00 strike price and to the February 5th, 2021 expiration date.  Importantly, the options expiration dates for all three positions are prior to their next quarterly earnings reports.  The potential return-on-investment results for these three positions are: 

• GoHealth Inc. (GOCO) -- +22.8% absolute return (equivalent to +46.3% annualized) for the 180 days of this investment  
• Draftkings Inc. (DKNG) -- +10.6% absolute return (equivalent to +67.0% annualized) for the 58 days of this investment
• Alibaba Group Holdings Ltd. (BABA) -- +4.2% absolute return (equivalent to +28.3% annualized) for the 54 days of this investment 
  

The transactions to-date and the potential return results are detailed below for each position.

1. GoHealth Inc. -- Rollout of Covered Calls Continuation
The Buy/Write transaction was as follows:
08/24/2020 Bought 400 shares of GoHealth Inc. stock @ $15.00 per share 
08/24/2020 Sold 4 GoHealth Sept 18th, 2020 $15.00 Call options @ $1.05 per share
Note: the Implied Volatility of these Calls was very high at 61.6 today when this transaction was made.
09/18/2020 GOCO Call options expired since stock closed below the strike price
09/23/2020 Sold 4 GOCO Oct 16th, 2020 $15.00 Call options at $.80 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $14.54 today when these Call options were sold.
10/16/2020 GOCO Call options expired since stock closed below the strike price
11/04/2020 Sold 4 GOCO Nov. 20th, 2020 $12.50 Call options at $.70 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $11.82 today when these Call options were sold.
11/20/2020 GOCO Call options expired since stock closed below the strike price
12/04/2020 Sold 4 GOCO Dec. 18th, 2020 $12.50 Call options at $.30 against the 400 shares of GoHealth stock to continue the GoHealth Covered Calls position.
Note: the price of GOCO was $11.62 today when these Call options were sold.
12/18/2020 Bought-to-Close 4 GOCO Dec. 18th $12.50 Calls at $1.80
Note: the stock price was $14.24 when this transaction was executed, so the time value remaining in these Calls was $.06 =[$1.80 Call options price - ($14.24 stock price - $12.50 strike price)]
12/18/2020 Sold-to-Open 4 GOCO Jan. 15th, 2021 Call options at $.80 per share.
Note: the price of GOCO stock was $14.34 when these Calls were sold.
01/15/2021 Rollout transaction: Bought-to-Close 4 GOCO Jan. 15th, 2021 $15.00 Call options at $.07 per share and simultaneously Sold-to-Open 4 GOCO February 19th, 2021 $15.00 Calls at $1.44 per share. This rollout transaction occurred at a net credit of $1.37 ($1.44 - $.07) per share.  The GOCO stock price was $15.01 when this transaction was executed.

A possible overall performance result if the position is in-the-money at options expiration (including commissions) is as follows:
Covered Calls Cost Basis: $5,582.68
= ($15.00 - $1.05) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,274.60
= ($1.05 + $.80 + $.70 + $.30 - $1.80 + $.80 +$1.44 - $.07) * 400 shares - $13.40 commissions
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If GoHealth stock is assigned at $15.00 strike price at Feb. 19th expiration): +$0.00
= ($15.00 assignment price - $15.00 stock purchase price) * 400 shares

Total Net Profit (If GOCO stock closes above $15.00 at Feb. 19th, 2021 options expiration): +$1,274.60
= (+$1,274.60 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If stock closes above $15.00 strike price at options expiration): +22.8%
= +$1,274.60/$5,582.68
Equivalent Annualized Return: +46.3%
= (+$1,274.60/$5,582.68)*(365/180 days)

2. Draftkings Inc. -- Roll-Up-and-Out Covered Calls Continuation The simultaneous buy/write transaction was as follows:
12/10/2020 Bought 300 shares of Draftkings Inc. stock @ $48.80 per share 
12/10/2020 Sold 3 Draftkings January 15th, 20210 $45.00 Call options @ $6.56 per share
Note: the Delta of these Calls was 68.0, which approximates the probability that the Calls will expire in-the-money at the Jan 15th options expiration. 
01/15/2021 Roll-Out-and-Up transaction: Bought-to-Close 3 DKNG Jan. 15th, 2021 $45.00 Call options at $8.95 per share and simultaneously Sold-to-Open 3 DKNG February 5th, 2021 $50.00 Calls at $5.70 per share. This roll-up-and-out transaction occurred at a net debit of $3.25 ($8.95 - $5.70) per share and the price of DKNG stock was $53.85 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $12,674.01
= ($48.80 - $6.56) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$988.98
= ($6.56 +$5.70 - $8.95) * 300 shares - $4.02 commissions
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DKNG stock is above $50.00 strike price at the Feb.5th, 2021 expiration): +$360.00
= ($50.00 assignment price  - $48.80 stock purchase price) * 300 shares

Total Net Profit: +$1,348.98
= (+$988.98 options income +$0.00 dividend income +$360.00 capital appreciation)

Absolute Return: +10.6%
= +$1,348.98/$12,674.01
Equivalent Annualized Return: +67.0%
= (+$1,348.98/$12,674.01)*(365/58 days)


3. Alibaba Group Holdings Ltd. (BABA) -- Roll-Up-and-Out Covered Call Continuation

The transactions were as follows:
12/14/2020 Bought 100 shares of Alibaba stock @ $257.80 per share 
12/14/2020 Sold 1 Alibaba Dec 31st, 2020 $250.00 Call option @ $11.60 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 30.5 when this transaction was executed.
12/31/2020 BABA Call option expired since stock closed below the strike price
01/05/2021 Sold 1 BABA Jan. 15th, 2021 $240.00 Call option at $5.50 against the 100 shares of Alibaba stock to continue the Alibaba Covered Call position.
Note: the price of BABA was $237.02 today when this Call option was sold.
01/15/2021 Roll-Up-and-Out transaction: Bought-to-Close 1 BABA Jan. 15th, 2021 $240.00 Call option at $3.05 per share and simultaneously Sold-to-Open 1 BABA February 5th, 2021 $245.00 Call at $9.05 per share. This roll-up-and-out transaction occurred at a net credit of $6.00 ($9.05 - $3.05) per share and the price of BABA stock was $242.95 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $24,620.67
= ($257.80 - $11.60) * 100 shares

Net Profit Components:
(a) Option Income: +$2,310.00
= ($11.60 + $5.50 +$9.05 - $3.05) * 100 shares - $7.00 commissions
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $245.00 strike price at Feb. 5th, 2021 expiration): -$1,280.00
= ($245.00 assignment price -$257.80 stock purchase price) * 100 shares

Total Net Profit: +$1,030.00
= (+$2,310.00 Call option income +$0.00 dividend income -$1,280.00 capital appreciation)

Absolute Return: +4.2%
= +$1,030.00/$24,620.67
Equivalent Annualized Return: +28.3%
= (+$1,030.00/$24,620.67)*(365/54 days)

As always, please email me at partlow@cox.net if you have any comments or questions related to this post or anything related to Covered Calls investing.

Best Regards, Jeff

Established Covered Calls Position in Pfizer Inc.

Today, a Covered Calls position was established in Pfizer Inc. (PFE) when the Covered Calls Advisor's buy/write limit orders was executed. Three hundred shares were purchased at $36.46 and three February 19th, 2021 Call options were sold at $1.91 at the $35.00 strike price.  Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established.  The Delta was 69.5 and this approximates a probability  of 69.5% that the Call options will be in-the-money on the options expiration date. Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since this January 28th, 2021 ex-dividend is prior to the February 19th options expiration date.  There is an intervening quarterly earnings report on February 2nd, 2021 so the Covered Calls Advisor will track this position regularly to determine whether or not it should be closed out prior to the earnings report.

As detailed below, two potential return-on-investment results for this Covered Calls position is: 

• Pfizer Inc.: +1.3% absolute return (equivalent to +36.6% annualized return-on-investment for the next 13 days) if the stock is assigned early (business day prior to the January 28th ex-dividend date); OR (2) +2.4% absolute return (equivalent to +24.6% annualized return over the next 36 days) if the stock is assigned on the February 19th options expiration date.

Pfizer Inc. (PFE) -- New Covered Calls Position
The buy/write transaction was:
01/15/2021 Bought 300 Pfizer shares @ $36.46
01/15/2021 Sold 3 Pfizer 02/19/2021 $35.00 Call options @ $1.91  Note: the Time Value (aka Extrinsic Value) in the Call options was $.45 per share = [$1.91 Call options premium - ($36.46 stock price - $35.00 strike price)]
01/28/2021 Upcoming quarterly ex-dividend of $.39 per share

Two possible overall performance results (including commissions) for this Pfizer Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $10,367.01
= ($36.46 - $1.91) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$573.00
= ($1.91 * 300 shares)
(b) Dividend Income (If options exercised early on Jan. 27th, 2021 -- the business day prior to the Jan. 28th ex-div date): +$0.00; or
(b) Dividend Income (If Pfizer stock assigned at Feb. 19th, 2021 expiration): +$117.00
= ($.39 dividend per share x 300 shares)

(c) Capital Appreciation (If Pfizer Call options assigned early on Jan. 27th): -$438.00
+($35.00 - $36.46) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $35.00 strike price at options expiration): -$438.00
+($35.00 - $36.46) * 300 shares

1. Total Net Profit (If options exercised on business day prior to Jan. 28th ex-dividend date): +$135.00

= (+$573.00 options income +$0.00 dividend income -$438.00 capital appreciation); or

2. Total Net Profit (If Pfizer shares assigned at $35.00 strike price on February 19th, 2021 options expiration date): +$252.00

= (+$573.00 +$117.00 -$438.00)

1. Absolute Return (If options exercised early on January 27th, 2021): +1.3%

= +$135.00/$10,367.01

Annualized Return (If options exercised early): +36.6%

= (+$135.00/$10,367.01)*(365/13 days); or

2. Absolute Return (If Pfizer shares assigned at $35.00 at Feb. 19th, 2021 options expiration): +2.4%

= +$252.00/$10,367.01

Annualized Return (If Pfizer shares assigned at $35.00 on Feb. 19th, 2021 expiration): +24.6%

= (+$252.00/$10,367.01)*(365/36 days)

Either outcome provides a satisfactory return-on-investment result for this Pfizer investment.  These returns will be achieved as long as the stock is above the $35.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $34.16 ($36.46 -$1.91 -$.39) provides 6.3% 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 must be 'YES' prior to establishing a position.  As shown below with this Pfizer position, eight of the nine criteria were 'YES'.

Covered Calls Position Established in Citigroup Inc.

Today, a Covered Calls position was established in Citigroup Inc. (ticker symbol C) with the purchase of 300 shares at $66.30 per share and three February 19th, 2020 monthly Call options were sold for $4.92 per share at the $62.50 strike price.  Given the Covered Calls Advisor's currently cautious  Overall Market Meter sentiment, a moderately in-the-money Covered Calls positions was established.  The Delta of the Calls was 71.7 when this buy/write transaction was executed which approximates the probability of assignment on the February 19th, 2021 options expiration date.  

Citigroup reported their 2020 Q4 earnings before market open this morning.  Their revenues were 10% below the same pre-Covid quarter last year and their earnings were 2.3% below last year.  Their Return on Tangible Common Equity was 11.8%, well above the 10.0% regulatory minimum requirement.  Their key profitability metrics are likely to improve in 2021.  Citi's current Price-to-Tangible Book Value at .86 is equivalent to their prior 5-year average value.  Also, they intend to initiate stock buybacks in 2021.   

Most mid- to large-cap companies in the Financial Sector provide only modest growth prospects, but they often pay 2.0%+ annual dividend yields.  Consequently, the Covered Calls Advisor is targeting opportunities to use the Dividend Capture Strategy in all Financial Sector Covered Calls positions established in upcoming months.  This new February Citigroup monthly Covered Calls position continues the Dividend Capture Strategy of often selling in-the-money monthly Covered Calls for one of the four biggest U.S. money center banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) for each options expiration month:
(JPMorgan Chase quarterly for Jan, Apr, July, and Oct options expirations;
Citigroup and/or Wells Fargo for Feb, May, Aug, and Nov options expirations; and
Bank of America for Mar, Jun, Sep, and Dec options expirations).

The goal of these monthly Covered Calls in the money center banks is to both capture the quarterly dividend payment and for the stock prices to remain above the strike price at options expiration, thereby achieving the maximum possible return-on-investment result for the position.  So far, this approach has provided higher annualized return results than would be achieved with either: (1) Covered Calls in these same stocks during their non-ex-dividend months; or (2) A simple buy-and-hold stock purchase of these bank stocks.    Hopefully, these outperformance results achieved to-date using this strategy will continue with this February 19th Citigroup Covered Calls position.

Two potential return-on-investment results are: (a) +1.8% absolute return (equivalent to +39.2% annualized return for the next 17 days) if the stock is assigned early [on the last trading day prior to the ex-dividend date]; OR (b) +2.7% absolute return (equivalent to +26.9% annualized return over the next 36 days) if the stock is assigned on the February 19th options expiration date. 

Citigroup Inc. (C) -- New Covered Calls Position
The transactions were:
01/15/2021 Bought 300 Citigroup shares @ $66.30
01/15/2021 Sold 3 Citigroup 2/19/2021 $62.50 Call options @ $4.92
Note: the Implied Volatility of these Call options was 33.4 when this position was established.
02/01/2021 Upcoming quarterly ex-dividend estimated at $.51 per share

Two possible overall performance results (including commissions) for this
Citigroup Covered Calls position are as follows:
Covered Calls Cost Basis: $18,416.01
= ($66.30 - $4.92) *300 + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,476.00
= ($4.92 *300 shares)
(b) Dividend Income (If option exercised early on the business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If Citi shares assigned at Feb. 19th, 2021 expiration): +$153.00
= ($.51 dividend per share x 300 shares)
(c) Capital Appreciation (If Citigroup shares assigned early): -$1,140.00
+($62.50 strike price -$66.30 stock purchase cost) *300 shares; or
(c) Capital Appreciation (If Citi shares assigned at $62.50 strike price at options expiration): -$1,140.00
+($62.50-$66.30) *300 shares

1. Total Net Profit [If option exercised on Jan. 31st, 2021 (business day prior to a February 1st ex-dividend date)]: +$336.00

= (+$1,476.00 +$0.00 -$1,140.00); or

2. Total Net Profit (If Citi shares assigned at $62.50 at Feb 19th, 2021 options expiration): +$489.00

= (+$1,476.00 +$153.00 -$1,140.00)

1. Absolute Return (If Citigroup options exercised early on the business day prior to the expiration date): +1.8%

= +$336.00/$18,416.01

Annualized Return (If option exercised early): +39.2%

= (+$336.00/$18,416.01)*(365/17 days); or

2. Absolute Return (If Citigroup shares assigned at $62.50 at Feb. 19th, 2021 expiration): +2.7%

= +$489.00/$18,416.01

Annualized Return (If Citi stock assigned at $62.50 at Feb 19th expiration): +26.9%

= (+$489.00/$18,416.01)*(365/36 days)

Either outcome would provide a good return-on-investment result.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $60.87 ($66.30 -$4.92 -$.51) provides 8.2% downside protection below today's purchase price.

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 Citigroup Inc. Covered Calls position.

Established Covered Calls Position in Lennar Corp. Using Dividend Capture Strategy

Late this morning, a buy/write limit order in Lennar Corp. (ticker LEN) was executed at the Covered Calls Advisors' net debit price of $71.43 per share. Two hundred shares were purchased at $76.39 and two January 29th, 2021 Call options were sold for $4.96 at the $72.50 strike price, a time value of $1.07 = [$4.96 option premium - ($76.39 stock price - $72.50 strike price)] per share.  

This position uses the Covered Calls Advisor's Dividend Capture Strategy.  Although not yet declared, it is likely that Lennar will have an upcoming quarterly ex-dividend of $.25 per share prior to the January 29th options expiration date on about January 28th.  This is equivalent to an absolute annualized dividend yield of 1.3% (at the current $76.39 stock price) and an equivalent annualized dividend yield of 7.0% = [($.25/$76.39) x (365/17 days to expiration)] for the 17 days duration of this position.  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 29th expiration date would be desirable to the Covered Calls Advisor given the high annualized return-on-investment upon assignment for either outcome.

This Lennar position mirrors the Lennar Covered Calls position established last quarter (in October 2020) which was also based on the Dividend Capture Strategy.  As described when that position was established, there are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently very positive for homebuilders. In terms of demographics, ages 26-32 are the prime ages for first-time buyers and years 2020 to 2024 will see the largest number of young adults in this age category in U.S. history. In terms of interest rates, 10-year Treasury rates below 2.0% provide attractive, affordable financing for new buyers. The current rate is only 1.09% and mortgage credit is readily available. Finally, the most recent monthly reading of current supply of houses is only 4.1 months which is near an all-time (since 1963 when data was first measured) low.  Historically, supply conditions remain attractive to builders until this inventory factor exceeds 7.0 months.  Also in this regard, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100).  The most recent month's (i.e. September 2021) index with a reading of 76 is a good "sellers market".   The Covered Calls Advisor will continue to track these factors and will likely remain invested in monthly Covered Calls in homebuilder industry companies as long as all three of these metrics remain positive.

As preferred by the Covered Calls Advisor, there is no upcoming quarterly earnings report prior to the October 22nd, 2021 options expiration date, the next quarterly earnings report is scheduled for December 15th.

Important 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.     

As detailed below, two potential return-on-investment results are: 

•  +   % absolute return (equivalent to +    % annualized return for the next 9 days) if the stock is assigned early (business day prior to the October 13th ex-dividend date); OR 

• +   % absolute return (equivalent to +    % annualized return over the next 19 days) if the stock is assigned on the October 22nd options expiration date.

Lennar Corp. (LEN) -- New Covered Calls Position
The buy/write transaction was:
01/13/2021 Bought 200 Lennar Corp. shares @ $76.39
01/13/2021 Sold 2 LEN 01/29/2021 $72.50 Call options @ $4.96
Note: the Implied Volatility of the Call options was 37.5 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 73.3.
01/22/2021 Expected upcoming quarterly ex-dividend of $.25 per share

Two possible overall performance results (including commissions) for this Lennar Corp. Covered Calls position are as follows:
Covered Calls Cost Basis: $14,287.34
= ($76.39 - $4.96) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$992.00
= ($4.96 * 200 shares)
(b) Dividend Income (If option exercised early on January 21st, the business day prior to Jan. 22nd ex-div date): +$0.00; or
(b) Dividend Income (If Lennar stock assigned at January 29th, 2021 options expiration): +$50.00
= ($.25 dividend per share x 200 shares)

(c) Capital Appreciation (If LEN Call option assigned early on Jan. 21st): -$778.00
+($72.50 - $76.39) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $72.50 strike price at options expiration): -$778.00
+($72.50 - $76.93) * 200 shares

1. Total Net Profit [If option exercised on Jan. 21st (business day prior to Jan. 22nd, 2021 ex-dividend date)]: +$214.00

= (+$992.00 options income +$0.00 dividend income -$778.00 capital appreciation); or

2. Total Net Profit (If LEN shares assigned at $72.50 at Jan. 29th, 2021 expiration): +$264.00

= (+$992.00 +$50.00 -$778.00)

1. Absolute Return [If option exercised on business day prior to a Jan. 22nd ex-dividend date]: +1.5%

= +$214.00/$14,287.34

Annualized Return-on-Investment (If option exercised early): +34.2%

= (+$214.00/$14,287.34)*(365/16 days); or

2. Absolute Return (If Lennar shares assigned on Jan. 29th options expiration date): +1.8%

= +$264.00/$14,287.34

Annualized Return-on-Investment (If LEN shares assigned at $72.50 at January 29th, 2021 expiration): +39.7%

= (+$264.00/$14,287.34)*(365/17 days)

Either outcome provides an attractive return-on-investment result for this Lennar Covered Calls investment.  These returns will be achieved as long as the stock is above the $72.50 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $71.18 ($76.39 stock price -$4.96 Call option price -$.25 dividend) provides 6.8% 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 Lennar Covered Calls position.

Established Covered Calls Position in Lowes Companies Inc. Using Dividend Capture Strategy

Today, a buy/write limit order in Lowes Companies Inc. (ticker LOW) was executed at the Covered Calls Advisors' net debit price of $163.52 per share. Two hundred shares were purchased at $169.86 and two January 29th, 2021 Call options were sold for $6.34 at the $165.00 strike price, therefore a time value of $1.48 = [$6.34 option premium - ($169.86 stock price - $165.00 strike price)] per share.  

This position uses the Covered Calls Advisor's Dividend Capture Strategy since Lowes has an upcoming quarterly ex-dividend of $.60 per share on January 19th which is prior to the January 29th options expiration.  This is equivalent to an absolute annualized dividend yield of 1.4% (at the $169.86 stock price) and an equivalent annualized dividend yield of 7.6% = [($.60/$169.86) x (365/17 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 29th expiration date would be desirable to the Covered Calls Advisor given the potential annualized return on investments for either outcome.  Importantly to the Covered Calls Advisor, there is no quarterly earnings report prior to the options expiration date.

As shown on the table at the bottom of this post, all nine criteria of the  Dividend Capture Strategy 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 somewhat during the next 17 days, hopefully the decline will be a moderate one and the stock price of Lowes will not decline below the $165.00 strike price at closing on the January 29th options expiration date.  The Delta for these Call options was 71.8 when this position was established which approximates the probability that the position will be in-the-money at market close on the options expiration date.  

As detailed below, two potential return-on-investment results are: 

•  +0.9% absolute return (equivalent to +55.1% annualized return for the next 6 days) if the stock is assigned early (business day prior to the Tuesday, January 19th ex-dividend date).  Note: the last business day prior to the ex-div date is this Friday, January 15th since the stock market is closed the following Monday, the Martin Luther King, Jr. Holiday.
  

• +1.3% absolute return (equivalent to +27.3% annualized return over the next 17 days) if the stock is assigned on the January 29th, 2021 options expiration date.

Lowes Companies Inc. (LOW) -- New Covered Calls Position
The buy/write transaction was:
01/13/2021 Bought 200 Lowes Companies Inc. shares @ $169.86
01/13/2021 Sold 2 Lowes 01/29/2021 $165.00 Call options @ $6.34
Note: Implied Volatility (IV) of the Call options was at 22.8 when this position was transacted.   
01/19/2021 Upcoming quarterly ex-dividend of $.60 per share

Two possible overall performance results (including commissions) for this Lowes Companies Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $32,705.34
= ($169.86 - $6.34) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,268.00
= ($6.34 * 200 shares)
(b) Dividend Income (If option exercised early on Jan.18th, 2021, the business day prior to the Jan. 19th ex-div date): +$0.00; or
(b) Dividend Income (If Lowes stock assigned at Jan. 29th, 2021 options expiration): +$120.00
= ($.60 dividend per share x 200 shares)

(c) Capital Appreciation (If Lowes Call options assigned early on Jan. 18th): -$972.00
+($165.00 - $169.86) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $165.00 strike price at options expiration): -$972.00
+($165.00 - $169.86) * 200 shares

1. Total Net Profit [If option exercised on January 18th (business day prior to the January 19th ex-dividend date)]: +$296.00

= (+$1,268.00 options income +$0.00 dividend income -$972.00 capital appreciation); or

2. Total Net Profit (If Lowes shares assigned at $165.00 at January 29th, 2021 expiration): +$416.00

= (+$1,268.00 +$120.00 -$972.00)

1. Absolute Return [If option exercised on business day prior to ex-dividend date]: +0.9%

= +$296.00/$32,705.34

Annualized Return (If option exercised early): +55.1%

= (+$296.00/$32,705.34)*(365/6 days); or

2. Absolute Return (If Lowes shares assigned on Jan. 29th options expiration date): +1.3%

= +$416.00/$32,705.34

Annualized Return (If Lowes shares assigned at $165.00 at Jan. 29th, 2021 expiration): +27.3%

= (+$416.00/$32,705.34)*(365/17 days)

Either outcome provides an attractive return-on-investment result for this Lowes Companies Inc. investment.  These returns will be achieved as long as the stock is above the $165.00 strike price at assignment.  However, if the stock declines below the strike price, the breakeven price of $162.92 ($169.86 -$6.34 -$.60) provides 4.1% 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.  As shown below, all nine criteria are achieved for this Lowes Companies Inc. Covered Calls position.

Covered Call Position Established in Facebook Inc.

A new Covered Call position was established today in Facebook Inc. (FB) by purchasing 100 shares at $266.443 per share and selling one Call option at the $265.00 strike price with a February 5th, 2021 options expiration date for $13.31 per share.  The Call option premium received was very attractive since the Implied Volatility (IV) of the Call was 41.8 when this position was established.  A primary reason for this abnormally high IV for Facebook is because of the elevated uncertainty given that the next quarterly earnings report on January 27th, 2021 is prior to the February 5th options expiration date.  But the Covered Calls Advisor is reasonably confident the earnings will exceed analysts' projections and Facebook would thereby retain its position as the megacap tech stock (among the FAAMG group) with the most attractive valuation metrics profile.

As detailed below, a potential return-on-investment result for this Facebook position is:
+4.7% absolute return in 29 days (equivalent to a +59.0% annualized return-on-investment) if the stock closes above the $265.00 strike price at the February 5th, 2021 options expiration date.
  

Facebook Inc. (FB) -- New Covered Call Position

The Covered Calls Advisor's buy/write limit order was transacted as follows:
01/08/2021 Bought 100 Facebook shares @ $266.443
01/08/2021 Sold 1 Facebook 2/05/2021 $265.00 Call option @ $13.31. 

A possible overall performance result (including commissions) for this Facebook Inc. Covered Call position is as follows:
Covered Call Cost Basis: $25,313.97
= ($266.443 - $13.31) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$1,331.00
= ($13.31 * 100 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If FB shares assigned at $265.00 strike price at options expiration): -$144.30
+($265.00 - $266.443) * 100 shares

 Total Net Profit (If Facebook shares assigned at $265.00 strike price at February 5th, 2021 expiration): +$1,186.70

= (+$1,331.00 option income +$0.00 dividend income -$144.30 capital appreciation)

Absolute Return  (If Facebook shares assigned at $265.00 on the Feb. 5th, 2021 expiration date): +4.7%

= +$1,186.70/$25,313.37

Annualized Return-on-Investment: +59.0%

= (+$1,186.70/$25,313.37)*(365/29 days)

Early Assignment of Lincoln National Corporation Covered Calls

This morning the Covered Calls Advisor was notified by Schwab that the three Lincoln National Corp. January 15th, 2021 $45.00 Call options were exercised early yesterday (on January 7th, 2021), the last business day prior to today's (January 8th) ex-dividend date.   There was $.07 time value [$7.70 midpoint of $7.50/$7.90 bid/ask range - ($52.63 stock price - $45.00 strike price)] remaining in the Call options, so the owner of the Calls exercised their right to buy the 300 shares of LNC at the $45.00 strike price and capture today's (January 8th) $.42 ex-dividend.  

As detailed below, a very attractive +2.8% absolute return in 21 days (equivalent to a +48.4% annualized return-on-investment) was achieved for this position.  The Covered Calls Advisor was pleased with this result since the annualized return of +48.4% that has been achieved slightly exceeded the +47.1% annualized roi that might have been achieved in the future if the stock price remains above the strike price on the January 15th expiration date and therefore the stock would instead be assigned then.

Lincoln National Corp. (LNC) -- Covered Calls Early Assignment
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 Early exercise of 3 LNC Jan. 15th, 2021 $45.00 Call options, so 300 LNC shares were assigned (i.e. sold) at the $45.00 strike price.

The overall performance results (including commissions) for this Lincoln National Covered Calls position were 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 (Options exercised early on Jan.7th, the business day prior to the Jan. 8th ex-div date): +$0.00
(c) Capital Appreciation: -$924.00
+($45.00 - $48.08) * 300 shares

Total Net Profit [Options 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)

 

 Absolute Return [Options exercised on business day prior to ex-dividend date]: +2.8%

= +$366.00/$13,136.01

Annualized Return: +48.4%

= (+$366.00/$13,136.01)*(365/21 days)

Closed Covered Calls Position in JPMorgan Chase & Co.

Yesterday, JPMorgan Chase & Co. (ticker JPM) went ex-dividend at $.90 per share.  Today the Covered Calls Advisor decided to close the JPM Covered Calls (CC) position.  The stock increased from the purchase price a week ago of $125.22 to $130.64 this morning when the January 15th, 2021 Covered Calls at the $120.00 strike price was closed out.  

This JPM Covered Calls position was established with the knowledge that JPM's upcoming quarterly earnings report is before market open on January 15th, 2021 which is also the options expiration date.  Since the Covered Calls Advisor prefers to avoid earnings reports and also since there was only $.34 time value [$10.98 Call options price - ($130.64 stock sales price - $120.00 strike price)] remaining in the Call options when this position was closed, the annualized return-on-investment result of +47.5% (detailed below) was better by closing the position today than the +26.2% annualized return-on-investment that would be achieved if the position was instead assigned on the January 15th options expiration date.  

As detailed below, the return-on-investment result is +0.9% absolute return in 7 days (equivalent to a +47.5% annualized return-on-investment).  
 

JPMorgan Chase & Co. (JPM) -- Covered Calls Position Closed

The buy/write transaction was:
12/30/2020 Bought 200 JPM shares @ $125.22
12/30/2020 Sold 2 JPM 01/15/2021 $120.00 Call options @ $5.78
01/05/2021 Quarterly ex-dividend of $180.00 = ($.90 per share x 200 shares)
01/06/2021 Closed out (i.e. unwound) the JPM Covered Calls position by Selling-to-Close 200 JPM shares @ $130.64 and simultaneously Buying-to-Close the 2 JPM 1/15/2021 Call options @ $10.98 per share. 

The overall performance results (including commissions) for this JPM Covered Calls position was as follows:
Stock Purchase Cost: $23,889.34
= ($125.22 - $5.78) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: -$1,046.29
= ($5.78 - $10.98) *200 shares - $6.29 commissions
(b) Dividend Income (Jan. 5th ex-dividend): +$180.00
= ($.90 dividend per share x 200 shares)

(c) Capital Appreciation (JPM shares sold at $130.64): -$1,084.00
+($130.64 -$125.22)*200 shares

 

Total Net Profit: +$217.71

= (-$1,046.29 options income +$180.00 dividend income +$1,084.00 capital appreciation)
 

Absolute Return: +0.9%

= +$217.71/$23,889.34

Annualized Return: +47.5%

= (+$217.71/$23,889.34)*(365/7 days)