Today a Covered Calls position was established in Raytheon Technologies Inc. (ticker symbol RTX) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $72.40 and 2 March 5th, 2021 Call options were sold at $3.06 per share at the $70.00 strike price. There is an upcoming ex-dividend of $.475 per share (a 2.6% annual dividend yield) on February 25th, 2021. Two potential return-on-investment results for this position are detailed below and include the possibility of early exercise since the ex-dividend is prior to the March 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 71.9, which approximates the probability of 71.9% that the Call options will be in-the-money on the options expiration date. Important to the Covered Calls Advisor, Raytheon has already reported their Q4 2020 earnings report, so there is no intervening earnings report prior to the March 5th options expiration date.
In early 2020, Raytheon merged with United Technologies (after they spun-out their Carrier and Otis Elevators divisions) making the new Raytheon a very strong company with approximately equal parts defense and commercial business revenues. The Covered Calls Advisor has noticed that often in the second year after a big event like a merger or change of CEO, the company achieves a substantial earnings improvement, and this seems likely in this case for Raytheon. In addition, Raytheon is in a very strong competitive position according to Morningstar, who rates it as having wide moats in 3 of its 4 business divisions (Collins Aerospace, Pratt & Whitney, and Raytheon Missiles and Defense) plus a narrow moat in its Intelligence and Space business. Of the 19 analysts covering Raytheon and tracked by Reuters Research, 15 have Outperform or Buy ratings, 4 have Neutral ratings, and none have Underperform or Sell ratings. Their average stock target price is $82.13 (13.4% above its current price).
As detailed below, two potential return-on-investment results are:
- +1.0% absolute return (equivalent to +43.4% annualized return for the next 8 days) if the stock is assigned early (business day prior to the February 25th ex-dividend date); OR
- +1.6% absolute return (equivalent to +35.1% annualized return over the next 17 days) if the stock is assigned on the March 5th options expiration date.
Raytheon Technologies Corporation (RTX) -- New Covered Calls Position
The buy/write transaction was:
02/17/2021 Sold 2 Raytheon 03/05/2021 $70.00 Call options @ $3.06
Note: the Time Value (aka Extrinsic Value) in the Call options was $.66 per share = [$3.06 Call options premium - ($72.40 stock price - $70.00 strike price)] when this transaction executed.
02/25/2021 Upcoming quarterly ex-dividend of $.475 per share
Two possible overall performance results (including commissions) for this Raytheon Covered Calls position are as follows:
Covered Calls Cost Basis: $13,869.34
= ($72.40 - $3.06) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$612.00
= ($3.06 * 200 shares)
(b) Dividend Income (If option exercised early on Feb. 24th, 2021, the business day prior to the Feb. 25th ex-div date): +$0.00; or
(b) Dividend Income (If Raytheon stock assigned at March 5th, 2021 options expiration): +$95.00
= ($.475 dividend per share x 200 shares)
+($70.00 strike price - $72.40 stock purchase price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $70.00 strike price at options expiration): -$480.00
+($70.00 - $72.40) * 200 shares
Either outcome would provide an attractive return-on-investment result for this Raytheon Technologies investment. These returns will be achieved as long as the stock is above the $70.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $68.865 ($72.40 -$3.06 -$.475) provides 4.9% 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 Raytheon Technologies position, all nine criteria were met.
