On February 1st, 2021, the Covered Calls Advisor established a Covered Calls position in D.R. Horton Inc. at the February 26th, 2021 $70.00 strike price. The price of the 200 D.R. Horton shares has spiked higher from the purchase price of $76.28 to $83.45 this afternoon when the Covered Calls Advisor's debit spread limit order was executed at a net debit of $8.98 per share ($13.43 - $4.45). DHI stock was at $83.45 when the transaction occurred, so there was only $.02 time value remaining [$83.45 stock price - ($70.00 strike price + $13.43 Call options bought-to-close price)] in the $70.00 Call options.
Note: I don’t have a predetermined remaining time value before acting, but when the stock price goes deep-in-the-money, I watch Call options pricing for various strike prices and expiration dates to see if there are roll-up or roll-up-and-out transactions that I find attractive.
DHI goes ex-dividend next Tuesday at $.20 per share and instead of the almost certainty that the shares would be assigned early this Friday (on the last business day prior to the ex-div date since the stock market is closed next Monday for Presidents Day), so the Covered Calls Advisor decided to roll-up to the $80.00 strike price at the same February 26th, 2021 options expiration date. The Delta for these $80.00 Calls was 72.2 when this transaction occurred, which approximates the probability that the Call options will be in-the-money on the Feb. 26th options expiration date.
A potential return-on-investment result for this D.R. Horton Covered Calls position is +3.4% absolute
return in 26 days (equivalent to a +48.3% annualized
return-on-investment) if the stock price closes above the $80.00 strike price on the February 26th options expiration date.
By rolling up the original Covered Calls, this result would exceed the +2.0% absolute return (+27.7% annualized) that was the maximum potential of the original Covered Calls position at the $70.00 strike price at expiration. In Covered Calls investing parlance, this is sometimes referred to as
"hitting a double" (instead of the usual "single"), since the roll-up
enables us to sell Calls twice against the original stock purchase (with both
being at the same options expiration date).
The detailed transactions and a potential result are provided below.
D.R. Horton Inc. (DHI) -- Roll-Up 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.
02/10/2021 Roll-Up transaction: Bought-to-Close 2 DHI Feb. 26th, 2021 $70.00 Call options at $13.43 per share and simultaneously Sold-to-Open 2 DHI February 26th, 2021 $80.00 Calls at $4.45 per share. Note: the Implied Volatility of the $80.00 strike price Calls was 33.1 when this debit spread transaction was executed.
02/16/2021 Upcoming ex-dividend of $.20 per share
The overall performance results (including commissions) if assigned at expiration 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: -$310.68
= ($7.44 - $13.43 + $4.45) * 200 shares - $2.68 commissions
(b) Dividend Income: (If D.R. Horton stock is above $80.00 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 above $80.00 strike price at the Feb 26th expiration): +$744.00
= ($80.00 - $76.28) * 200 shares
Total Net Profit (If D.R. Horton stock is above $80.00 strike price at the Feb 26th expiration): +$473.32
= (-$310.68 options income +$40.00 dividend income +$744.00 capital appreciation)
Absolute Return: +3.4%
= +$473.32/$13,769.34
Equivalent Annualized Return: +48.3%
= (+$473.32/$13,769.34)*(365/26 days)
