Today the Covered Calls Advisor's buy/write limit order was executed and a Covered Calls position was established in IBM Corp. (ticker IBM) with a February 26th, 2021 options expiration date. Two hundred IBM shares were purchased at $118.15 and two Call options were sold at $3.99 at the $115.00 strike price -- so the net debit was $114.16 per share ($118.15 stock price - $3.99 Call options price). Therefore, an initial time value of $.84 per share ($115.00 strike price - $114.16 net debit cost basis) was achieved. The Delta was approximately 68.5 when this transaction was executed which closely approximates the probability that the Call options will be in-the-money (i.e. above the $115.00 strike price) on the options expiration date. There is an upcoming ex-dividend of $1.63 per share (a 5.5% annual dividend yield at the $118.15 purchase price) on February 9th which is prior to the February 26th options expiration date. So two potential return-on-investment results are detailed below and include both the possibility of early assignment on the day prior to the ex-dividend date as well as the more likely scenario that the stock is in-the-money, and therefore assigned (i.e. sold at the $115.00 strike price), on the Feb. 26th options expiration date.
IBM reported their Q4 2020 earnings two weeks ago and although revenues and earnings were below those of the same quarter last year, they exceeded analysts' estimates. Importantly, even in this Covid-19 induced recession year, their current P/E ratio is 13.6 which is below their prior 5-year historic average P/E of 14.6. Importantly, analysts expect earnings to increase in 2021 by 27% which is a P/E of only 10.7 at today's stock price. IBM's revenue have steadily declined during the past 9 years, but the
second half of 2021 could begin an inflection to higher year-over-year
revenues. IBM is well positioned to benefit from the substantial future
opportunities in hybrid cloud and artificial intelligence and the new
tandem CEO (the first technologist CEO in IBM's history) and President
(the former Red Hat CEO) leadership team seem capable of leading this transition. The average one-year target price of 18 analysts following IBM and tracked by Reuters Research is $137.13 (16.1% above the current price).
However, the Covered Calls Advisor does not consider IBM to be a candidate as a long-term holding. But given its generous dividend yield of 5.5%, which is unusual for a technology-related company (most of whom provide relatively small or no dividend yields), it will be evaluated each quarter that it pays a dividend to see if it meets the Covered Calls Advisor's Dividend Capture strategy criteria (as it does this month).
As detailed below, two potential return-on-investment results are:
- +0.7% absolute return (equivalent to +44.8% annualized return-on-investment for the next 6 days) if the stock is assigned early (business day prior to the February 9th ex-dividend date); OR
- +2.2% absolute return (equivalent to +32.9% annualized return over the next 26 days) if the stock is assigned on the February 26th options expiration date.
IBM Corp. (IBM) -- New Covered Calls Position
The buy/write transaction was:02/03/2021 Bought 200 IBM shares @ $118.15
02/03/2021 Sold 2 IBM 2/26/2021 $115.00 Call options @ $3.99
Note: the Bid/Ask spread was $3.90/$4.15 when this transaction was executed.
02/09/2021 Upcoming quarterly ex-dividend of $1.63 per share
Two possible overall performance results (including commissions) for this IBM Covered Calls position are as follows:
Covered Calls Cost Basis: $22,833.34
= ($118.15 - $3.99) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$798.00
= ($3.99 * 200 shares)
(b) Dividend Income (If both options exercised early on Feb. 8th, the business day prior to the Feb 9th ex-div date): +$0.00; or
(b) Dividend Income (If IBM stock assigned at February 26th, 2021 expiration): +$326.00
= ($1.63 dividend per share x 200 shares)
= +($115.00 - $118.15) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $115.00 strike price on the options expiration date): -$630.00
= +($115.00 - $118.15) * 200 shares
Either outcome provides an attractive return-on-investment result for this IBM investment. These returns will be achieved as long as the stock is above the $115.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $112.52 ($118.14 -$3.99 -$1.63) provides 4.8% 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 IBM position, all nine criteria were met.
