This position uses the Covered Calls Advisor's Dividend Capture Strategy since Home Depot has an upcoming quarterly ex-dividend of $1.65 per share on March 10th which is prior to the March 19th options expiration. This is equivalent to an absolute annualized dividend yield of 2.6% (at the $258.75 stock price) and an equivalent annualized dividend yield of 9.7% = [($1.65/$258.75) x (365/24 days to expiration)]. 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 March 19th expiration date would be desirable to the Covered Calls Advisor given the potential annualized return-on-investment for either outcome.
There were two primary advantages for establishing a Covered Call position instead of a Cash-Secured Put position: (1) Since there is an intervening ex-dividend prior to options expiration, the Covered Call provides a possibility of early assignment at a somewhat higher annualized return-on-investment than if the position were to instead be assigned on the options expiration date; and (2) As shown in the comparison chart below, the potential annualized return-on-investment at expiration of +28.9% for the Covered Call is greater than the potential +25.9% for the comparable Cash-Secured Put position. The Covered Calls Advisor has observed that it is normally advantageous to enter a Covered Calls position (instead of the comparable 100% Cash-Secured Puts position) whenever there is an intervening ex-dividend date prior to the options expiration date.
Also important to the Covered Calls Advisor, Home Depot's quarterly earnings were reported yesterday, so there is no earnings report before the options expiration date. In addition, although the Covered Calls Advisor depends primarily on fundamental
value factors in deciding what stocks to purchase, a minor consideration
is given to technical factors. In that regard, the 2-day Relative
Strength Index [i.e. RSI(2)] for Home Depot moved deep into short-term oversold
territory this morning at a very low reading of 2.1 when this position was established. (Note: below 30 is normally considered as
oversold and above 70 is considered overbought).
As shown on the table at the bottom of this post, all nine criteria of
the Dividend Capture Strategy 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. The Delta for these Call options was 69.7 when this position was established which approximates the probability that the position will be in-the-money at market close on the options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.2% absolute return (equivalent to +32.1% annualized
return for the next 14 days) if the stock is assigned early (business day
prior to the March 10th ex-dividend date).
- +1.9% absolute return (equivalent to +28.9% annualized return over the next 24 days) if the stock is assigned on the March 19th, 2021 options expiration date.
Home Depot Inc. (HD) -- New Covered Call Position
The buy/write transaction was:
02/24/2021 Bought 100 Home Depot shares @ $258.75
02/24/2021 Sold 1 Home Depot 03/19/2021 $250.00 Call option @ $11.79
Note: Implied Volatility (IV) of the Call options was at 24.7 when this position was established.
03/10/2021 Upcoming quarterly ex-dividend of $1.65 per share
Two possible overall performance results (including commissions) for this Home Depot Covered Call position are as follows:
Covered Calls Cost Basis: $24,696.67
= ($258.75 - $11.79) * 100 shares + $.67 commission
Net Profit Components:
(a) Options Income: +$1,179.00
= ($11.79 * 100 shares)
(b) Dividend Income (If option exercised early on March 9th, 2021, the business day prior to the March 10th ex-div date): +$0.00; or
(b) Dividend Income (If Home Depot stock assigned at March 19th, 2021 options expiration): +$165.00
= ($1.65 dividend per share x 100 shares)
+($250.00 - $258.75) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $250.00 strike price at options expiration): -$875.00
+($250.00 - $258.75) * 100 shares
Either outcome provides an attractive return-on-investment result for this Home Depot investment. These returns will be achieved as long as the stock is above the $250.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $245.32 ($258.75 -$11.79 -$1.65) provides 5.2% 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. As shown below, all nine criteria are achieved for this Home Depot Inc. Covered Call position.
