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.
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)
+($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
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.
