A short-term Covered Calls position in Capital One Financial Corp.(ticker COF) was established with a February 19th, 2021 options expiration date. Two hundred shares of Capital One were purchased at $115.96 and two Call options were sold at $3.82 per share at the $113.00 strike price. A moderately in-the-money strike price was selected with a Delta (a good approximation of the probability of assignment at expiration) of 71.5. Importantly, there is no intervening earnings prior to the options expiration date as Capital One's 4th Qtr 2020 earnings were reported in late January, 2021.
There is an ex-dividend date next Tuesday (2/16) of $.40 per share, so capturing this dividend is included in the potential return-on-investment results detailed below. The time value obtained when this position was established was $.86 per share [$3.82 options premium - ($115.96 stock price - $113.00 strike price)]. In the unlikely event that the owner of these Call options exercises their option tomorrow afternoon (on the last business day before the ex-dividend date since the stock market is closed on Monday for Presidents Day), the Covered Calls Advisor would make a $169.32 profit [($.86 x 200 shares) - $2.68 commission] over the five day period.
A potential return-on-investment result if this position closes in-the-money at the February 19th options expiration date is +1.1% absolute
return in 9 days (equivalent to a +45.6% annualized
return-on-investment).
The simultaneous buy/write transaction was as follows:
02/11/2021 Bought 200 shares of Capital One stock @ $115.96 per share
02/11/2021 Sold 2 COF February 19th, 2021 $113.00 Call options @ $3.82 per share
Note: the Implied Volatility of the Call option was about 27.5
02/16/2021 Upcoming ex-dividend of $.40 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $22,429.34
= ($115.96 - $3.82) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$764.00
= ($3.82 * 200 shares)
(b) Dividend Income: +$80.00
= $.40 per share x 200 shares
(c) Capital Appreciation (If COF stock is above $113.00 strike price at the Feb. 19th options expiration): -$592.00
= ($113.00 -$115.96) * 200 shares
Total Net Profit: +$172.00
= (+$764.00 options income +$80.00 dividend income - $592.00 capital appreciation)
Absolute Return: +1.1%
= +$252.00/$22,429.34
Equivalent Annualized Return: +45.6%
= (+$252.00/$22,429.34)*(365/9 days)
These returns will be achieved if the stock is above the $113.00 strike price at the market closing on the February 19th, 2021 options expiration date. If the Capital One stock declines below the strike price, the breakeven price of $111.74 ($115.96 -$3.82 -$.40) provides 3.6% downside breakeven protection below today's purchase price.
