A short-term Covered Calls position in WestRock Company (ticker WRK) was established with a February 19th, 2021 options expiration date. Four hundred shares of WestRock were purchased at $42.79 and four Call options were sold at $3.02 per share at the $40.00 strike price. A deep in-the-money strike price was selected with a Delta (a good approximation of the probability of assignment at expiration) of 82.3. Importantly, there is no intervening earnings prior to the options expiration date as WestRock's 4th Qtr 2020 earnings were reported on January 28th, 2021.
WestRock is benefiting from a leadership position in a favorable market -- the fiber-based packaging industry that serves both manufacturers' production packaging as well as retailers packing needs for their rapidly growing ecommerce businesses. WestRock's stock market valuation is also attractive, trading at only 6.0x 2021 estimated EV/EBITDA versus the prior 5-year average of 7.2x. Also, the average target price reported by Reuters Research for the 14 analysts covering WestRock is $50.79 (+18.7% above the current price).
There is an ex-dividend date this Wednesday (2/10) of $.20 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 $.23 per share [$3.02 options premium - ($42.79 stock price - $40.00 strike price)]. In the unlikely event that the owner of these Call options exercises their option tomorrow afternoon (on the day before the ex-dividend date), the Covered Calls Advisor would make a $89.32 profit [($.23 x 400 shares) - $2.68 commission] in two days.
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 12 days (equivalent to a +32.9% annualized
return-on-investment).
The simultaneous buy/write transaction was as follows:
02/08/2021 Bought 400 shares of WestRock stock @ $42.79 per share
02/08/2021 Sold 4 WRK February 19th, 2021 $40.00 Call options @ $3.02 per share
Note: the Implied Volatility of the Call option was 27.9
02/10/2021 Upcoming ex-dividend of $.20 per share
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $15,910.68
= ($42.79 - $3.02) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,208.00
= ($3.02 * 400 shares)
(b) Dividend Income: +$80.00
= $.20 per share x 400 shares
(c) Capital Appreciation (If WRK stock is above $40.00 strike price at the Feb. 19th options expiration): -$1,116.00
= ($40.00 -$42.79) * 400 shares
Total Net Profit: +$172.00
= (+$1,208.00 options income +$80.00 dividend income - $1,116.00 capital appreciation)
Absolute Return: +1.1%
= +$172.00/$15,910.68
Equivalent Annualized Return: +32.9%
= (+$172.00/$15,910.68)*(365/12 days)
These returns will be achieved if the stock is above the $40.00 strike price at the market closing on the February 19th, 2021 options expiration date. If the stock declines below the strike price, the breakeven price of $39.57 ($42.79 -$3.02 -$.20) provides 7.5% downside breakeven protection below today's purchase price.
Email me at partlow@cox.net if you have any questions related to Covered Calls investing.
Jeff
