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.