Established Covered Calls in D.R. Horton Inc.

Today the Covered Calls Advisor's limit order was executed and a Covered Calls position was established in D.R. Horton Inc. (ticker DHI) with a February 26th, 2021 options expiration date.  Two D.R. Horton Call options were sold at $7.44 at the $70.00 strike price when the stock price was $76.28 -- the net debit was $68.84 per share [$7.44 options price - ($76.28 stock price - $70.00 strike price)]; therefore an initial time value of $1.16 per share ($70.00 strike price - $68.84 net debit cost basis) was achieved.  The Delta was approximately 78.1 when this transaction was executed which is a moderately in-the-money position and consistent with the Covered Calls Advisor's current cautious market outlook. There is an intervening ex-dividend of $.20 per share on February 16th.  Two potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the February 16th, 2021 ex-dividend is prior to the February 26th options expiration date.

D.R. Horton is the largest homebuilder in America by market cap. Importantly, it is considered the best-in-class operator in its industry and has the highest exposure to the critically important entry-level buyers (67% of closings), lowest debt leverage, and least on-balance sheet land risk. The most recent earnings report on January 26th was very positive and its earnings per share exceeded analysts' average estimates by 26.8%.  The strong demand for new homes continues to benefit from near-record low mortgage rates.  Important for the Covered Calls Advisor, the next quarterly earnings report on April 27th, 2021 is after the February 26th options expiration date.  This is the third homebuilder industry position (the other two being in KBH Homes and Lennar Corp.) currently in the Covered Calls Advisor Portfolio.

As detailed below, two potential return-on-investment results are: 

•  +1.7% absolute return (equivalent to +41.0% annualized return for the next 15 days) if the stock is assigned early (business day prior to the February 16th ex-dividend date); OR 

• +2.0% absolute return (equivalent to +27.7% annualized return over the next 26 days) if the stock is assigned on the February 26th options expiration date.

 

D.R. Horton Inc. (DHI) -- New Covered Calls Position

The Buy/Write transaction was as follows:
02/01/2021 Bought 200 shares of D.R. Horton Inc. stock @ $76.28 per share 
02/01/2020 Sold 2 D.R. Horton February 26th, 2021 $70.00 Call options @ $7.44 per share
Note: the Implied Volatility of the Calls was 40.8 which (as desired by the Covered Calls Advisor) was above the S&P 500 Volatility Index (VIX) reading of 32.1 when this transaction was executed.
02/16/2021 Upcoming ex-dividend of $.20 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Call Cost Basis: $13,769.34
= ($76.28 - $7.44) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,488.00
= ($7.44 * 200 shares)
(b) Dividend Income: (If DHI shares assigned on last business day prior to the ex-div date): $0.00; or
(b) Dividend Income: (If D.R. Horton stock is above $70.00 strike price at the Feb 26th options expiration):+$40.00
= $.20 per share x 200 shares
(c) Capital Appreciation (If D.R. Horton stock is assigned on the day prior to the ex-div date): -$1,256.00
= ($70.00 - $76.28) * 200 shares; or
(c) Capital Appreciation (If D.R. Horton stock is above $70.00 strike price at the Feb 26th expiration): -$1,256.00
= ($70.00 - $76.28) * 200 shares

1. Total Net Profit (If DHI shares assigned on last business day prior to the ex-div date): +$232.00
= (+$1,488.00 options income +$0.00 dividend income -$1,256.00 capital appreciation); or
2. Total Net Profit (If D.R. Horton stock is above $70.00 strike price at the Feb 26th expiration): +$272.00
= (+$1,488.00 options income +$40.00 dividend income -$1,256.00 capital appreciation)

1. Absolute Return (If D.R. Horton stock is assigned on the day prior to the ex-div date): +1.7%
= +$232.00/$13,769.34
Equivalent Annualized Return (If D.R. Horton stock is assigned on the day prior to the ex-div date): +41.0%
= (+$232.00/$13,769.34)*(365/15 days); or
2. Absolute Return (If D.R. Horton stock is above $70.00 strike price at the Feb 26th expiration): +2.0%
= +$272.00/$13,769.34
Equivalent Annualized Return: +27.7%
= (+$272.00/$13,769.34)*(365/26 days)

Either outcome would provide an attractive return-on-investment result for this D.R. Horton Inc. 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 $68.64 ($76.28 -$7.44 -$.20) provides 10.0% 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 D.R. Horton position, eight criteria were met.