Covered Calls Position Established in Comcast Corporation

Just prior to market close today, a Covered Calls position was established in Comcast Corporation (ticker CMCSA) by buying 300 shares at $54.14 and simultaneously selling 3 April 16th, 2021 Call options at the $52.50 strike price.  The Covered Calls Advisor's Dividend Capture Strategy was used since there is an intervening quarterly dividend of $.25 next Tuesday (April 6th, 2021).

A moderately in-the-money strike price was selected with a Delta of 74.9 when this buy/write transaction was executed.  The time value per share was $.30 = [$52.50 strike price - ($54.14 stock price - $1.94 Call options premium)]. 

Two potential return-on-investment results are: (1) +0.6% absolute return in 6 days (equivalent to a +35.0% annualized return-on-investment) if the position is assigned early on April 5th on the last business day prior to next Tuesday's ex-dividend date; or (2) +1.1% absolute return in 17 days (equivalent to a +22.6% annualized return-on-investment) if the position is assigned on the April 16th, 2021 options expiration date. 

Comcast Corporation (CMCSA) -- New Covered Calls Position

The buy/write transaction was as follows:
03/31/2021 Bought 300 shares of Comcast Corporation @ $54.14 per share 
03/31/2021 Sold 3 Comcast April 16th, 2021 $52.50 Call options @ $1.94 per share
04/06/2021 Ex-dividend of $.25 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $15,662.01
= ($54.14 - $1.94) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$582.00
= ($1.94 * 300 shares)
(b) Dividend Income (If Comcast shares assigned on day prior to ex-distribution date): +$0.00; or
(b) Dividend Income (If Comcast shares assigned on April 16th options expiration date): +$75.00
=  $.25 per share x 300 shares
(c) Capital Appreciation (If Comcast shares are above $52.50 strike price and early assignment occurs on April 5th, 2021): -$492.00
= ($52.50 - $54.14) * 300 shares; or
(c) Capital Appreciation (If Comcast is above $52.50 strike price at the April 16th, 2021 expiration): -$492.00
= ($52.50 - $54.14) * 300 shares

1. Total Net Profit (If Comcast shares assigned on last business day prior to April 6th ex-dividend date): +$90.00
= (+$582.00 options income +$0.00 dividend income -$492.00 capital appreciation); or
2. Total Net Profit (If Comcast shares assigned on April 16th options expiration date): +$165.00
= (+$582.00 options income +$75.00 dividend income -$492.00 capital appreciation)

1. Absolute Return (If Comcast shares assigned on last business day prior to ex-distribution date): +0.6%
= +$90.00/$15,662.01
Equivalent Annualized Return: +35.0%
= (+$90.00/$15,662.01)*(365/6 days); or
2. Absolute Return (If Comcast shares assigned on April 16th options expiration date): +1.1%
= +$165.00/$15,662.01
Equivalent Annualized Return: +22.6%
= (+$165.00/$15,662.01)*(365/17 days)

Early Assignment of Bristol-Myers Squibb Co. Covered Calls

Surprisingly, the four Bristol-Myers Squibb Co. April 16th, 2021 $60.00 Call options were exercised early on the day prior to today's (March 31st) ex-dividend date. The reason this was a surprise to the Covered Calls Advisor was that the owner of these Call options decided to immediately forgo the remaining $.61 time value in the Calls to buy the stock and therefore also capture today's $.49 ex-dividend. 

This is a good outcome for the Covered Calls Advisor since the resulting +36.4% annualized return-on-investment (aroi) achieved is better than the +25.5% maximum possible aroi that might have been achieved later at the options expiration date if the stock was above the $60.00 strike price on the expiration date.  As detailed below, a net profit of $284.00 was achieved in 12 days since the full $876.00 income (profit) received from selling the options exceeded the $592.00 loss in the stock price value.  For any Covered Calls position where there is an ex-dividend date prior to the options expiration date, the Covered Calls Advisor usually prefers to have the stock called away (assigned) early, normally the day prior to the ex-div date.  The reason is that the Covered Calls Advisor's Dividend Capture Strategy spreadsheet was designed to identify positions where the annualized-return-on-investment from early assignment is most often greater than what might be achieved if the stock is instead assigned at the options expiration date.  The transactions and detailed results for this position are as follows:

 

Bristol-Myers Squibb Co. (BMY) -- Covered Calls Position Closed by Early Assignment
The buy/write transaction was:
3/19/2021 Bought 400 Bristol-Myers Squibb Co. shares @ $61.48 3/19/2021 Sold 4 BMY 4/16/2021 $60.00 Call options @ $2.19
3/31/2021 4 BMY Call options exercised, so Call options expired and 400 BMY shares were sold at the $60.00 strike price

The overall performance results (including commissions) for this Bristol-Myers Squibb Co. Covered Calls position was as follows:
Covered Calls Cost Basis: $23,718.68
= ($61.48 - $2.19) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$876.00
= ($2.19 * 400 shares)
(b) Dividend Income (Call options assigned early on March 30th, 2021, the business day prior to the March 31st ex-div date): +$0.00
(c) Capital Appreciation (BMY Call options assigned early on March 30th, 2021): -$592.00
= +($60.00 - $61.48) * 400 shares

Total Net Profit [Call options exercised on March 30th (business day prior to the March 31st ex-dividend date)]: +$284.00

= (+$876.00 options income +$0.00 dividend income -$592.00 capital appreciation)

 

Absolute Return: +1.2%

= +$284.00/$23,718.68

Annualized Return (If option exercised early): +36.4%

= (+$284.00/$23,718.68)*(365/12 days)

Established New Positions in Quest Diagnostics Inc., Oscar Health Inc., and Herbalife Nutrition Ltd.

Today, four limit orders were submitted as follows:
1. Quest Diagnostics Inc. (ticker DGX) -- A buy/write limit order was placed to buy 200 shares and sell two April 16th, 2021 $125.00 Call options at a net debit of $123.60 per share.
2. Oscar Health Inc.(OSCR) -- A buy/write limit order was placed to buy 300 shares and sell three April 16th, 2021 $25.00 Call options at a net debit of $23.34 per share.
3. Herbalife Nutrition Ltd.(HLF) -- A limit order was placed to sell three HLF April 16th, 2021 $42.50 Put options at $.65 per share.
4. Comcast Corporation (CMCSA) -- A buy/write limit order was placed to buy 300 shares and sell three April 16th, 2021 $52.50 Call options at a net debit of $52.06 per share.

The first three positions above were executed at the specified limit prices.  The fourth position (Comcast) did not execute today, so I will put it in my notes to re-consider it again tomorrow.  The detailed transactions and potential return-on-investment results for the three new positions in the Covered Calls Advisor Portfolio are as follows:

1. Quest Diagnostics Inc. (DGX) -- New Covered Calls Position
Quest is one of only six companies that appeared on both the (a) Large-Cap Value and Profitability and also the (b) Quantitative Value screeners developed by the Covered Calls Advisor (the other five are Cisco, Kellogg, Lockheed Martin, Lowe's, and Philip Morris).  In terms of value, Quest's trailing twelve months P/E Ratio is only 11.4 and its Cash Return on Invested Capital is 15.4%.

Included in the analysis below, there is an upcoming ex-dividend of $.62 on April 6th, 2021 which is prior to the April 16th options expiration date.    

The buy/write transaction was as follows:
03/30/2021 Bought 200 shares of Quest Diagnostics Inc. @ $126.93  
03/22/2021 Sold 2 DGX April 16th, 2021 $125.00 Call options @ $3.33 per share
Note: the Implied Volatility of these slightly in-the-money Call options was 19.8 when this transaction executed. 
04/06/2021 Upcoming $.62 per share ex-dividend

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $24,721.34
= ($126.93 - $3.33) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$666.00
= ($3.33* 200 shares)
(b) Dividend Income (If stock is assigned early on April 5th (the day prior to the ex-dividend date): +$0.00; OR
(b) Dividend Income (If the stock is assigned on the April 16th options expiration date): +$124.00
= $.62 per share x 200 shares
(c) Capital Appreciation (If Quest Diagnostics is assigned early): -$386.00
= ($125.00 price at expiration - $126.93 purchase price) * 200 shares; OR
(c) Capital Appreciation (If DGX share price is above $125.00 strike price at Apr 16th expiration): -$386.00
= ($125.00 -$126.93)* 200 shares

(a) Total Net Profit (If DGX shares assigned early on the day prior to the 4/6/2021 ex-div date): +$280.00
= (+$666.00 options income +$0.00 dividend income -$386.00 capital appreciation); OR
(b) Total Net Profit (If DGX shares close above the $125.00 strike price and are therefore assigned at expiration): +$404.00
= (+$666.00 options income +$124.00 dividend income -$386.00 capital appreciation)

(a) Absolute Return (If Quest shares assigned early on the day prior to the 4/6/2021 ex-div date): +1.1%
= +$280.00/$24,721.34
Equivalent Annualized Return (If assigned early): +59.1%
= (+$280.00/$24,721.34)*(365/7 days); OR
(b) Absolute Return (If Quest shares assigned at expiration): +1.6%
= +$404.00/$24,721.34
Equivalent Annualized Return (If assigned at expiration): +33.1%
= (+$404.00/$24,721.34)*(365/18 days)

The downside 'breakeven price' at expiration is at $122.98 ($126.93 price per share - $3.33 options income - $.62 dividend income), which is 3.1% below the current market price of $126.93.

 

2. Oscar Health Inc. (OSCR) -- New Covered Calls Position

The Covered Calls Advisor self imposes a limitation of no more than one small position at a time in a speculative company.  Most recently, positions in the Covered Calls positions in DraftKings and Uber Technologies expired in-the-money for a nice profit.  Oscar Health Inc. works primarily with individuals to assist them in obtaining affordable healthcare insurance.  Oscar's competitive advantage is in their advanced cloud-based member engagement platform.  They are a 4-time member of CNBC's Disruptor 50 companies.  Their Initial Public Offering (IPO) was March 1st, 2021 at $36.00 per share and their price has declined to $25.49 today when it was purchased.  Their quiet period ended yesterday, and six investment companies immediately came out with their analyst's recommendations, which were very positive given that their average target price is $37.83 (+48.4% above today's purchase price).  Credit Suisse's analysis is that their 'Growth-Adjusted EV/Sales Multiple" for 2021 of .05 is substantially better than the .11 average of their traditional health insurer competitors.  As noted before, this is a speculative (i.e. risky) investment given many future uncertainties, but I think this company has excellent growth potential and I will continue to track it carefully.   

The simultaneous Buy/Write transaction was as follows:
03/30/2021 Bought 300 Oscar Health shares @ $25.49 per share 
03/30/2021 Sold 3 OSCR April 16th, 2021 $25.00 Call options @ $2.15 per share
Note: the Implied Volatility of the Call options was very high at 81.0 when this transaction occurred, so the potential return-on-investment shown below is also very high.

A possible overall performance result (including commissions) if the stock price is above the $25.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $7,004.01
= ($25.49 - $2.15) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$645.00
= ($2.15 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If OSCR stock is above $25.00 strike price on the April 16th, 2021 options expiration): -$147.00
= ($25.00 - $25.49) * 300 shares

Total Net Profit (If Oscar Health stock is above the $25.00 strike price at the close on the April 16th, 2021 options expiration date): +$498.00
= (+$645.00 options income +$0.00 dividend income -$147.00 capital appreciation)

Absolute Return (If OSCR stock is above $25.00 strike price on the April 16th, 2021 options expiration) : +7.1%
= +$498.00/$7,004.01
Equivalent Annualized Return: +144.2%
= (+$240.00/$15,062.01)*(365/18 days)

The downside 'breakeven price' at expiration is at $23.34 ($25.49 - $2.15), which is 8.4% below the current market price of $25.49.

3. Herbalife Nutrition Ltd. (HLF) -- New 100% Cash-Secured Puts Position

The transaction today was as follows:
03/30/2021  Sold 3 Herbalife April 16th, 2021 $42.50 100% Cash-Secured Put options @ $.65 per share.  Note: the stock price was $44.63 when these Put options were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Puts Cost Basis: $12,557.01
= ($42.50 - $.65) * 300 shares + $2.01 commission

Net Profit:
(a) Options Income: +$192.99
= ($.65 * 300 shares) - $2.01 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Herbalife stock is above $42.50 strike price at the April 16th expiration): +$0.00
= ($42.50 - $42.50) * 300 shares

Total Net Profit (If HLF stock price is above $42.50 strike price at options expiration): +$192.99
= (+$192.99 option income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Herbalife stock is above $42.50 strike price at the April 16th, 2021 options expiration) : +1.5%
= +$192.99/$12,557.01
Annualized Return: +31.2%
= (+$192.99/$12,557.01)*(365/18 days)

The probability of assignment at market close on the April 16th, 2021 options expiration date was 73.5% when this position was established.  The downside 'breakeven price' at expiration is at $41.85 ($42.50 - $.65), which is 6.2% below the current market price of $44.6275.

Stock Selection Example for a Potential Covered Calls Position

I thought you might be interested in an example of how I identified and researched a company this weekend as a potential candidate as a Covered Calls investment.  That company turned out to be Hologic Inc.

Step 1: Of the 3,500+ stocks with options, how do we narrow it down to a manageable number of companies to consider?  For me, I've found online stock screeners (available free from your broker or by subscription from investment services) to be a good tool to do this.

Step 2: Over the past several years, I've developed numerous screeners which are customized for different purposes.  For example, the one I used here is a "Large-Cap Value, Profitability, and Growth" screener.  I won't get overly detailed now by describing the nine metrics used in this particular screener, but the companies identified by it were: Rio Tinto Inc., HCA Healthcare, Laboratory Corp., Hologic, Inc., Pulte Home Group, McKesson Corp., NVR Inc., Anthem Inc., and Lockheed Martin.  By the way, only 9 stocks from this screen is the lowest number I can remember.  With the market at all-time highs, it seems like it is now more difficult to find good undervalued companies to invest in.

Step 3: As you might recall, I already have a current position in Rio Tinto (see link).  Looking at the numbers for these 9 companies and then reading further about each one, my interest narrowed further to Hologic, Anthem, and Pulte.  During the past several months, I had already done detailed research on both Anthem and Pulte (and had successful positions in both of them), so I decided to research Hologic in more detail using my Options and Company Checklist:   

 

Step 4: Make a decision.  Hologic seems like a great candidate for a Covered Calls position, but my one remaining question is the extent to which Hologic's dramatic increase in revenue as a result of the dramatic increase in Covid assays performed by their Panther machines during the past year will decrease during the upcoming year and the impact of that on this year's revenue and earnings.  I will see if I can find existing comments from Hologic's CEO or CFO and also from any other resources on this question.  If I can get a good answer to this question and I like what I learn, then I'll establish a Covered Calls position and of course will post it on this blog site on the same day the position is established.  If not, I'll be satisfied to have learned a lot about the company and it would remain on my radar to consider as a possible future investment.

 

Step 5: After making a decision on Hologic, then proceed to further reading, research, and thinking in search for other potential Covered Calls investment opportunities.  Remember, "Good stock selection is Job #1 for us Covered Calls investors".

 

Hope you found something interesting and useful in this post.  As always, please email me with any questions.

 

Best Wishes and Godspeed,

Jeff Partlow
partlow@cox.net

Established Cash-Secured Puts Position in iShares MSCI Emerging Markets ETF

Today, ten 100% Cash-Secured Put options were sold in the iShares MSCI Emerging Markets ETF (ticker EEM) at the April 1st, 2021 $51.00 strike price at $.27 per share when EEM's price was $52.27. This out-of-the-money position has a probability of expiration of 76.4% at the options expiration date. Cash-Secured Puts were sold instead of their comparable Covered Calls in this case.  The time value available was an identical $.27 for either position so the positions (Cash-Secured Puts or Covered Calls) had identical risk/reward profiles.

As detailed below for this EEM 100% Cash-Secured Puts position, there is potential for a +0.5% absolute return in 8 days (equivalent to a +23.7% annualized return-on-investment). 

 

iShares MSCI Emerging Markets ETF (EEM) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
03/24/2021  Sold 10 EEM April 1st, 2021 $51.00 100% Cash-Secured Put options @ $.27 per share.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the ten Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Cost Basis: $50,736.70
= ($51.00 - $.27) * 1,000 shares + $6.70 commission

Net Profit:
(a) Options Income: +$263.30
= ($.27 * 1,000 shares) - $6.70 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EEM is above $51.00 strike price at the April 1st expiration): +$0.00
= ($51.00 - $51.00) * 1,000 shares

Total Net Profit (If EEM is above $52.00 strike price at options expiration): +$263.30
= (+$263.30 option income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +0.5%
= +$263.30/$50,736.70
Annualized Return: +23.7%
= (+$263.30/$50,736.70)*(365/8 days)

Established Covered Calls in Rio Tinto PLC

This morning, a Covered Calls debit limit order of $70.37 was entered for a position in Rio Tinto PLC (ticker RIO) at the $71.57 strike price and April 16th, 2021 options expiration date.   At 3:22pm this afternoon, the stock had declined by 2.4% today from yesterday's closing price and the limit order was executed -- purchased 200 RIO shares at $74.23 and sold 2 April 16th, 2021 $71.57 Calls for $3.86 per share.  Often, the Covered Calls Advisor will enter a Covered Calls position at a net debit limit price that provides a return-on-investment potential that equals or exceeds the desired minimum threshold for the investment.  Currently, the minimum potential Annualized ROI for a position of between 20 and 29 days duration (this RIO position is now 25 days until the expiration date) is 20.0%.  As shown in the calculations below, this position will achieve +24.9% annualized roi if it closes in-the-money on the options expiration date.  

The time value received when this RIO Covered Calls position was established was $1.20 per share = [$3.86 Call options price - ($74.23 stock price - $71.57 strike price)].  The odd $71.57 strike price was modified from the original $72.50 strike price to adjust for RIO's $.93 special dividend of March 4th, 2021.  The Delta was 65.9 which approximates a probability of 65.9% that the Call options will be in-the-money and therefore the stock assigned (i.e. sold) on the options expiration date. The Implied Volatility of these Call options was 32.0 today when this transaction was executed.

RIO Tinto was identified during the Covered Calls Advisor's analysis this weekend from a review of stocks passing my 'Quantitative Value' screener.  This screener is based on the model presented in "Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors" (see link).  The primary metric used is the EV/EBIT value factor, then screening further for high quality companies (based on ROA-related metrics) while also eliminating those companies with weak quality of earnings.  Rio Tinto was one of only five companies in the Materials sector that passed this screener.      

As detailed below, the potential return-on-investment result is +1.7% absolute return in 25 days (equivalent to a +24.9% annualized return-on-investment).  

Rio Tinto PLC (RIO) -- New Covered Calls Position

The simultaneous Buy/Write transaction was as follows:
03/23/2021 Bought 200 Rio Tinto shares @ $74.23 per share 
03/23/2021 Sold 2 Rio Tinto April 16th, 2021 $71.57 Call options @ $3.86 per share

A possible overall performance result (including commissions) if the stock price is above the $71.57 strike price at expiration would be as follows:
Covered Call Cost Basis: $14,075.34
= ($74.23 - $3.86) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$772.00
= ($3.86 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Rio Tinto stock is above $71.57 strike price at the April 16th, 2021 options expiration): -$532.00
= ($71.57 - $74.23) * 200 shares

Total Net Profit: +$240.00
= (+$772.00 options income +$0.00 dividend income -$532.00 capital appreciation)

Absolute Return: +1.7%
= +$240.00/$14,075.34
Equivalent Annualized Return: +24.9%
= (+$240.00/$14,075.34)*(365/25 days)

The downside 'breakeven price' at expiration is at $70.37 ($74.23 - $3.86), which is 5.2% below today's purchase price of $74.23.

Continuation of Alibaba Group Holdings Ltd. Covered Calls

Last Friday, two Alibaba Group Holdings Ltd. (BABA) Covered Calls at the $240.00 strike price expired out-of-the-money, so the two Call options expired and 200 BABA shares remained in the Covered Calls Advisor Portfolio.  This morning when the BABA stock price was $238.25, the Covered Calls position was continued by selling two BABA April 1st, 2021 $242.50 Call options at $3.35 per share.  The weighted average return-on-investment results will be +17.4% annualized over the 45 days holding period if the BABA stock price is in-the-money on the April 1st, 2021 options expiration date.  

Established Covered Calls Position in Qualcomm Inc.

Today, a Covered Calls position has been established in Qualcomm Inc.(ticker QCOM) at the $135.00 strike price and for the April 16th, 2021 options expiration date.  This position is slightly out-of-the-money since the 200 shares of QCOM stock was purchased at $133.43 (just below the $135.00 strike price).  Qualcomm appeared on the Covered Calls Advisor's PEG Ratio screener based on FY2020's earnings per share and this year substantial additional earnings per share are expected.  The Covered Calls Advisor believes that the softness in the stock price during the past two months is unwarranted, so a slightly bullish out-of-the-money strike price was chosen for this position.

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

+2.8% absolute return in 26 days (equivalent to a +38.9% annualized return-on-investment) if the price of QCOM is unchanged upon the April 16th, 2021 options expiration; OR

+4.0% absolute return in 26 days (equivalent to a +55.9% annualized return-on-investment) if the price of Qualcomm increases to above the $135.00 strike price on the expiration date. 

Qualcomm Inc.(QCOM) -- New Covered Calls Position
The transactions were as follows:
03/22/2021 Bought 200 shares of Qualcomm Inc. @ $133.43 
03/22/2021 Sold 2 QCOM April 16th, 2021 $135.00 Call options @ $3.60 per share
Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of these Call options was 28.9 when this transaction executed. 

Two possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $25,967.34
= ($133.43 - $3.60) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$720.00
= ($3.60* 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If QCOM is unchanged at $133.43 purchase price at April 16th expiration): +$0.00
= ($133.43 price at expiration - $133.43 purchase price)* 200 shares; OR
(c) Capital Appreciation (If QCOM is above $135.00 strike price at Apr 16th expiration): +$314.00
= ($135.00 -$133.43)* 200 shares

(a) Total Net Profit (If QCOM price unchanged at $133.43 at expiration): +$720.00
= (+$720.00 options income +$0.00 dividend income -$0.00 capital appreciation); OR
(b) Total Net Profit (If QCOM shares above $135.00 strike price and thus assigned at expiration): +$1,034.00
= (+$720.00 options income +$0.00 dividend income +$314.00 capital appreciation)

(a) Absolute Return (If QCOM price unchanged at expiration): +2.8%
= +$720.00/$25,967.34
Equivalent Annualized Return: +38.9%
= (+$720.00/$25,967.34)*(365/26 days); OR
(b) Absolute Return (If QCOM shares assigned at expiration): +4.0%
= +$1,034.00/$25,967.34
Equivalent Annualized Return: +55.9%
= (+$1,034.00/$25,967.34)*(365/26 days)

The downside 'breakeven price' at expiration is at $129.83 ($133.43 price per share - $3.60 options income), which is 2.7% below the current market price of $133.43.

Recommended Reading -- #5

1. Four things everyone needs to know about the markets: Link to article

2. Merrill Lynch describes 3 pillars of the bull market that are still firmly in place.  But also listen to the interview embedded at the top of the article with Mohamed El-Erian.  His take on the Federal Reserve Board's announcement this week by Jay Powell describes what we should watch for that might portend difficulty for the markets and his belief that now is the time for "targeted active stock selection":  Link  

3. But if "targeted active stock selection" is needed now, then what stocks are likely to outperform this year?  Watch Consuelo Mack's WealthTrak video interview of Richard Bernstein.  He makes the case that the current shift from growth stocks (such as the FANGs and other high P/E technology companies) to the lower P/E cyclical and value stocks is durable: Link

4. If Richard Bernstein is right, then what characteristics of value stocks should we focus on?  Validea makes the case that value companies with "quality" characteristics are currently under-valued: Link

5. The Dividend Growth Investor reminds us to consider companies with a history of growing dividends.  He contends that investors now are not giving adequate attention to these companies as contributors to returns for our portfolios: Link
Note: As an example, the Covered Calls Advisor's new position this past Friday is an example of a "quality, value-oriented, dividend-paying" company".  And if you have a favorite company with these qualities, please email me and include a short rationale for your choice. 

6. In last week's Recommended Reading -- #4, I included information about the super-successful Medallion Fund and their investing "decision-making processes" that drove their success.  I included my analysis of how four of their concepts could be applied to our Covered Calls investing.  I have long believed maintaining a calm, dispassionate, and analytical temperament in our investment decision-making is critically important.  It enables us to identify and then attempt to avoid behavioral biases that bedevil most individual investors.  Related is this article in the Farnam Street blog titled "The OODA Loop: How Fighter Pilots Make Fast and Accurate Decisions": Link (Hint: OODA is an acronym for Observe, Orient, Decide, and Act) that caused me to wonder if this OODA Loop can also be applied to our own Covered Calls investing-related decision-making processes?  As you read it, please consider whether (and how) you might try applying this mindset to your own decision-making -- including in our Covered Calls decision-making process. 

7. Consider the items highlighted above and related to them this question:
How do we find quality companies that are under-valued -- and then make buy/sell decisions while avoiding behavioral biases?
This question reminded me of an excellent book that addresses this question directly, namely "Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors" -- see here
Among my own stock screeners, I have included several metrics from insights gleaned from this book into my value-oriented screeners. So, if you are inclined toward a deep dive into this question, I highly recommend reading this book. It has been a few years since I read it, so I plan to re-read it during the next few weeks.  The authors of this book (Wes Gray and Tobias Carlisle) participated in a recent podcast interview (along with Jake Taylor of Farnam Street) where they shared many worthwhile, thought-provoking insights: listen here.
And finally: Wes, Toby, and Jake each have their own very good blogs (which I subscribe to in my Netvibes RSS read feeder and would recommend you consider adding to yours).

I hope you are finding these weekly "Recommended Reading" posts of some benefit, but I would appreciate your feedback via email. Should they or should they not be continued? 

Best Wishes and Godspeed,

Jeff Partlow
The Covered Calls Advisor
partlow@cox.net

 

March 19th, 2021 Monthly Options Expiration Results

The Covered Calls Advisor Portfolio had seventeen positions since last month's (February 19th, 2021) monthly options expiration date.  During this past month, the Covered Calls Advisor Portfolio closed out sixteen of these seventeen positions profitably, thus substantially outperforming the benchmark S&P 500 (SPY) ETF which had an absolute return-on-investment of -0.14% during the same time period.  

The results from these Covered Calls positions demonstrate three important concepts of Covered Calls investing:
1. Good stock selection is Job #1;
2. Thoughtful strike price and options expiration date selection are very important considerations when initiating a position; and
3. Daily active monitoring of positions is helpful for identifying position management opportunities (such as closing out a position or rolling a position) prior to its options expiration date.

 

The return-on-investment results for the sixteen closed positions during the past month are as follows:   

• Six positions expired in-the-money yesterday (on the March 19th, 2021 monthly options expiration date), so the options expired and the stocks were sold at their strike price.  The return-on-investment results were as follows:

1. D.R. Horton Inc. (DHI) Covered Calls -- +6.3% absolute return in 47 days (equivalent to +48.9% annualized return-on-investment).
2. Home Depot Inc. (HD) Covered Call -- +2.2% absolute return in 24 days (equivalent to +33.4% annualized return-on-investment).
3. iShares MSCI Emerging Markets ETF (EEM) 100% Cash-Secured Puts -- +0.8% absolute return in 10 days (equivalent to +30.7% annualized return-on-investment).
4. Micron Technology Inc. (MU) Covered Calls -- +7.8% absolute return in 52 days (equivalent to +54.5% annualized return-on-investment).
5. Regeneron Pharmaceuticals Inc. (REGN) 100% Cash-Secured Put -- +1.6% absolute return in 13 days (equivalent to +19.0% annualized return-on-investment); and
   
6. Uber Technologies Inc. (UBER) -- +1.6% absolute return in 18 days (equivalent to +32.3% annualized return-on-investment). 
   

 

• Four Covered Calls positions expired in-the-money on their weekly options expiration date and their results were:
  

1. Applied Materials Inc. (AMAT) -- +1.7% absolute return in 11 days (equivalent to +57.7% annualized return-on-investment).
2. Bank of America Corp. (BAC) -- +1.5% absolute return in 15 days (equivalent to +36.1% annualized return-on-investment).
3. Facebook Inc. (FB) -- +1.3% absolute return in 15 days (equivalent to +30.6% annualized return-on-investment).
4. Lennar Inc. (LEN) -- +4.8% absolute return in 52 days (equivalent to +33.5% annualized return-on-investment).

• Four Covered Calls were closed on the day prior to the ex-dividend date by Early Assignment.  The stocks were assigned (i.e. sold) at their strike prices with the following results:

1. Bank of America Corp. (BAC) -- +0.9% absolute return in 6 days (equivalent to +57.8% annualized return-on-investment).
   
2. Merck & Co. Inc. (MRK) -- +0.9% absolute return in 8 days (equivalent to +39.4% annualized return-on-investment).
3. Rio Tinto (RIO) -- +1.1% absolute return in 14 days (equivalent to +27.5% annualized return-on-investment).
4. Raytheon Technologies Inc. (RTX) -- +1.0% absolute return in 8 days (equivalent to +43.4% annualized return-on-investment).

• Two Covered Calls positions were unwound (closed out prior to their options expiration dates) to achieve a significantly greater annualized return-on-investment than would have occurred if it was instead assigned on their expiration date) with the following results:

1. GoHealth Inc. (GOCO) -- +17.8% absolute return in 182 days (equivalent to +35.7% annualized return-on-investment).
2. Pfizer Inc. (PFE) -- +0.3% absolute return in 38 days (equivalent to +2.8% annualized return-on-investment).

 

• One of the seventeen positions this month (in Alibaba Group Holdings Ltd.) expired out-of-the-money on the March 19th expiration date, so the 200 shares now remain in the Covered Calls Advisor Portfolio. A decision will be made early next week either sell these Alibaba shares or to continue with the Covered Calls position by selling future Call options against the shares currently held.

 

As shown in the right sidebar, there are currently four open positions in the Covered Calls Advisor Portfolio.  All future transactions and return-on-investment results for these positions will be posted on this blog site on the same day the transactions occur.  As always, I will be happy to receive and reply to your emails whenever you have any comments or questions related to Covered Calls investing.

Best Wishes,
Jeff
partlow@cox.net

Established Covered Calls Position in Bristol-Myers Squibb Co.

Today a Covered Calls position was established in Bristol-Myers Squibb Co. (ticker symbol BMY) when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $61.48 and four April 16th, 2021 Call options were sold at $2.19 at the $60.00 strike price.  BMY has a March 31st, 2021 ex-dividend of $.49 (3.1% annual dividend yield based on today's purchase price) which is included in the return-on-investment (roi) calculations below.

Just prior to establishing this BMY Covered Calls limit order, a comparison of whether a Covered Calls or its comparable Cash-Secured Puts position would be preferable.  As is normally the case when there is an intervening ex-dividend prior to options expiration, the Covered Calls position was preferable.  As shown in the chart below, there are two financial advantages to Covered Calls in this case: (1) the potential Annualized ROI at expiration for Covered Calls exceeds that of 100% Cash-Secured Puts (+25.5% versus +23.1%); and (2) Covered Calls provide an additional possibility of early assignment (normally on the day prior to the ex-dividend date) with a potential Annualized ROI of +36.4% which is better than the +25.5% AROI if assigned at expiration.  With Cash-Secured Puts dividends are never captured.  Note: Click on image below for a larger view.    

Bristol-Myers is rated as a Moderate Buy by analysts.  Reuters Research indicates that currently 14 analysts have a Buy or Outperform rating, 5 have a Hold, and none have an Underperform or Strong Sell; and their average target price is $74.59 (21.3% above today's purchase price).  Importantly, most of their fundamental valuation metrics (including various cash flow metrics) are currently better than their prior 5-year average.  Earnings per share in FY2020 were $6.44 per share and are estimated to grow by another 16% this year which implies a forward P/E ratio of only 8.2 based on Bristol's current price of $61.48.  On the down side, Bristol-Myers added substantial long-term debt to its Balance Sheet when it acquired Celgene late last year and MyoKardia last Novermber.  Morningstar's commentary in support of their wide moat rating is compelling and describes how they are positioned to improve their roic in the near-term future: "Based on a wide lineup of patent-protected drugs, an entrenched salesforce, and economies of scale, Bristol holds a wide economic moat.  The patent protection allows the firm to price its drugs at levels that translate into superior returns on invested capital compared with its cost (particularly in cancer drugs, an area of focus for Bristol).  The patents also provide Bristol with ample time to bring forward the next generation of new drugs.  Additionally, several of their currently marketed drugs are biologics, which create additional hurdles for generic small molecules.  Further, because many small drug companies lack a distribution channel, Bristol's entrenched salesforce enables the company to partner with these smaller drug companies to gain access to externally created drugs, augmenting its internal drug-development efforts.  Additionally, their sheer size generates the strong and stable cash flows required to fund the approximately $800 million needed, on average, to bring each new drug to the market."  

Although the Covered Calls Advisor depends primarily on fundamental valuation and competitive position factors in deciding what stocks to purchase, a minor consideration is given to technical factors.  In that regard, BMY stock was down 1.4% today from yesterday's closing price and the 2-day relative strength index [i.e. RSI(2)] for Bristol-Myers moved into short-term oversold territory at 23 (below 30 is normally considered oversold) this morning when this buy/write limit order was executed.

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.  All nine criteria are achieved for this Bristol-Myers position.

Covered Calls Position Established in the Financial Select Sector SPDR Fund

Today a Covered Calls position was established in the Financial Select Sector SPDR Fund (ticker XLF) by buying 400 shares at $34.16 and simultaneously selling 4 April 1st, 2021 Call options at the $33.00 strike price.  The Covered Calls Advisor's Dividend Capture Strategy was used since there is an intervening quarterly distribution of $.1512 next Monday (March 22nd, 2021).

A moderately in-the-money strike price was selected with a Delta of 76.1 when this buy/write transaction was executed.  The time value per share was $.20 = [$33.00 strike price - ($34.16 stock price - $1.36 Call options premium)]. 

Two potential return-on-investment results are: (1) +0.6% absolute return in 6 days (equivalent to a +37.1% annualized return-on-investment) if the position is assigned early on March 19th (this Friday) on the last business day prior to next Monday's ex-distribution date; or (2) +1.1% absolute return in 17 days (equivalent to a +23.0% annualized return-on-investment) if the position is assigned on the April 1st, 2021 options expiration date. 

Financial Select Sector SPDR Fund(XLF) -- New Covered Calls Position

The buy/write transaction was as follows:
03/16/2021 Bought 400 shares of the Financial Select Sector SPDR Fund @ $34.16 per share 
03/16/2021 Sold 4 XLF April 1st, 2021 $33.00 Call options @ $1.36 per share when the Implied Volatility of the Call options was 21.6
03/22/2021 Ex-distribution of $.1512 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $13,122.68
= ($34.16 - $1.36) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$544.00
= ($1.36 * 400 shares)
(b) Distribution Income (If XLF shares assigned on day prior to ex-distribution date): +$0.00; or
(b) Distribution Income (If XLF shares assigned on April 1st options expiration date): +$60.48
=  $.1512 per share x 400 shares
(c) Capital Appreciation (If XLF is above $33.00 strike price and early assignment on March 19th, 2021): -$464.00
= ($33.00 - $34.16) * 400 shares; or
(c) Capital Appreciation (If XLF is above $33.00 strike price at the April 1st, 2021 expiration): -$464.00
= ($33.00 - $34.16) * 400 shares

1. Total Net Profit (If XLF shares assigned on last business day prior to March 22nd ex-distribution date): +$80.00
= (+$544.00 options income +$0.00 dividend income -$464.00 capital appreciation); or
2. Total Net Profit (If XLF shares assigned on April 1st options expiration date): +$140.48
= (+$544.00 options income +$60.48 dividend income -$464.00 capital appreciation)

1. Absolute Return (If XLF shares assigned on last business day prior to ex-distribution date): +0.6%
= +$80.00/$13,122.68
Equivalent Annualized Return: +37.1%
= (+$80.00/$13,122.68)*(365/6 days); or
2. Absolute Return (If XLF shares assigned on April 1st options expiration date): +1.1%
= +$140.48/$13,122.68
Equivalent Annualized Return: +23.0%
= (+$140.48/$13,122.68)*(365/17 days)

Covered Call Position Established in SPDR S&P 500 ETF

As expected with the stock market near its all time high, the CBOE Volatiliy Index (VIX) is currently at 21.3 which is close to its low point during the past year. But with some available cash from assignment of recent weekly Covered Calls, the Covered Calls Advisor decided to take advantage of the upcoming quarterly ex-distribution this Friday in the SPDR S&P 500 ETF (SPY) using the Dividend Capture Strategy. The amount of the distribution has not yet been declared, but I estimate it at around $1.41 per share based on SPY's historic distribution trend. 

The SPY quarterly March 31st, 2021 options expiration date was selected and a relatively conservative deep-in-the-money $380.00 strike price was selected when the stock was at $392.22 and the Call option premium received was $13.64 per share. So, the time value per share was $1.42 = [$380.00 strike price - ($392.22 stock price - $13.64 Call option premium)]. The Call option Delta was 81.1 which approximates the probability of assignment (stock price above the strike price) on the March 31st expiration date.

Two potential return-on-investment results are: (1) +0.4% absolute return in 5 days (equivalent to a +27.4% annualized return-on-investment) if the position is assigned early this Thursday on the last day prior to the ex-distribution date; or (2) +0.7% absolute return in 17 days (equivalent to a +16.0% annualized return-on-investment) if the position is assigned on the March 31st, 2021 options expiration date. 

SPDR S&P 500 ETF (SPY) -- New Covered Call Position

The buy/write transaction was as follows:
03/15/2021 Bought 100 shares of SPDR S&P 500 ETF @ $392.22 per share 
03/15/2021 Sold 1 SPY March 31st, 2021 $380.00 Call option @ $13.64 per share
Note: the Implied Volatility of the Call options was 17.2 and its Open Interest was 3,235 contracts
03/19/2021 Ex-distribution estimated at $1.41 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $37,858.67
= ($392.22 - $13.64) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$1,364.00
= ($13.64 * 100 shares)
(b) Distribution Income (If SPY shares assigned on day prior to ex-distribution date): +$0.00; or
(b) Distribution Income (If SPY shares assigned on March 31st options expiration date): +$141.00
=  $1.41 per share x 100 shares
(c) Capital Appreciation (If SPY is above $380.00 strike price early on March 18th, 2021): -$1,222.00
= ($380.00 - $392.22) * 100 shares; or
(c) Capital Appreciation (If SPY is above $380.00 strike price at the March 31, 2021 expiration): -$1,222.00
= ($380.00 - $392.22) * 100 shares

1. Total Net Profit (If SPY shares assigned on day prior to March 19th ex-distribution date): +$142.00
= (+$1,364.00 options income +$0.00 dividend income -$1,222.00 capital appreciation); or
2. Total Net Profit (If SPY shares assigned on March 31st options expiration date): +$283.00
= (+$1,364.00 options income +$141.00 dividend income -$1,222.00 capital appreciation)

1. Absolute Return (If SPY shares assigned on day prior to ex-distribution date): +0.4%
= +$142.00/$37,858.67
Equivalent Annualized Return: +27.4%
= (+$142.00/$37,858.67)*(365/5 days); or
2. Absolute Return (If SPY shares assigned on March 31st options expiration date): +0.7%
= +$283.00/$37,858.67
Equivalent Annualized Return: +16.0%
= (+$283.00/$37,858.67)*(365/17 days)

Recommended Reading -- #4

I.  Over the years, whenever I need to learn more about any investing-related topic, I invariably do a search in Investopedia.com (here).  It is an excellent resource, so I would encourage you to do likewise whenever you encounter an investing-related term or concept where you would benefit by obtaining some additional insights.
I recommend reading this article: link (from Investopedia.com) titled "The Ins and Outs of Selling Options".   This article explains why options tend to favor the options seller over the options buyer, how to get a sense of the probability of success in selling an option, and the risks associated with selling options.  In short, it provides some useful insight on why we sellers of options (both Calls when we establish Covered Calls positions and and also Puts when establish 100% Cash-Secured Puts positions) have a financial advantage over buyers of options. 

II.  Over a decade ago on this blog, I wrote an article titled "Exploiting Our Covered Calls Investing Edges" -- read here.   In it, the following twelve primary "edges" (i.e. advantages) of Covered Calls investing when compared to a stocks buy-and-hold strategy were identified as:
1. Specialize in Covered Calls Investing
2. Active Management
3. Value-Oriented Stock Selection
4. Adjust Moneyness of Strike Prices
5. Sell Higher-Than-Average Volatility
6. Exploiting the Volatility Risk Premium
7. Increase Frequency of Trading
8. Adjust Our Position Sizing
9. Seek to Minimize Losses
10. Invest in Non-Correlated Assets
11. Use a Tax-Advantaged IRA Account
12. Use a Dividend Capture Strategy When Appropriate

In last week's Recommended Reading, an article was included where we thought about whether Peter Lynch, Warren Buffett, or John Templeton might have been the greatest investor of all time.  But their performance was much lower than that of the Medallion Fund (run by Jim Simons' company, Renaissance Technologies), that achieved an astounding 66%+ annualized return-on-investment over a 30-year period.  I was reminded of this while reading about their investing methods in this excellent book "The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution" (see here).  

Even if you don't read the book, I do strongly recommend you read the related information in this fascinating article (please read it carefully here).  As I was reading it this week, I focused on whether the Medallion Fund's super-successful approach could also be applied to our Covered Calls investing strategy as additional (i.e. secondary) Covered Calls investing "edges".  Fortunately, I identified four of their concepts that could be beneficial in our approach to Covered Calls investing, namely: 
1. Regarding Medallion's increased frequency of trades -- we can establish some weekly and/or bi-weekly CC trades instead of only monthlies.  The advantages to us is that shorter duration positions provide us (a) higher potential annualized return-on-investment results; and (b) more frequent opportunities to adjust the strike prices of subsequent positions based on up-to-the-moment stock prices and current market trends.
2. Regarding their position sizing decisions (using the Kelly Criterion) -- we can calculate our expected value return-on-investment for all Covered Call positions we are considering prior to entering the trade.  Therefore, we can also apply the Kelly Criterion when deciding our position size for each Covered Call investment we make.
3. Regarding improving long-term returns -- Please answer this question: If you lose 20.0% on your investments in Year 1, what percent increase will you need in Year 2 to get back to breakeven?  If your quick answer is 20.0%, you are incorrect.  The correct answer is 25.0%.  Compounded returns over time are not arithmetic averages.  Compounded returns are geometric averages, so as this simple example demonstrates, it takes a higher return-on-investment to fully recover (back to breakeven) from a negative return-on-investment period. 

So, we want to work hard to avoid losses since we have to achieve higher returns to bounce back to breakeven.  Therefore, good compounded returns are achieved by minimizing losses in comparison to that of the overall stock market.  Warren Buffett understood this principle very well (see image)

Achieving this will result in a reduction in the standard deviation of our investment returns over a period of time, and we know this is true because it is well-documented that Covered Calls are 30% less volatile than their comparable buy-and-hold stocks.  As Covered Calls investors, by selling Call options against our long stock positions we are hedging our long stock positions which reduces volatility by providing (a) downside breakeven price protection; and (b) decreased portfolio drawdowns during neutral and especially in bearish market periods.  The end result is an improvement for our overall geometric compounded returns.
4. Regarding Claude Shannon's contributions to the Medallion Fund's investing philosophy -- It is directly related to his work on rebalancing and correlations.  Like Medallion, we can also enhance geometric returns in our Covered Calls portfolio by both regularly rebalancing our portfolios and also by including non-correlated assets in our portfolios.  For example, related to non-correlated assets, we can establish Covered Calls portfolios with a group of stocks that are diversified by most of the eleven U.S. stock sectors as well as by including some positions with significant exposure to non-U.S. (i.e. international) markets.

I hope I didn't lose you in #3 above, but if I did and you want to understand it further, a careful reading (and perhaps a re-reading) of this article (read this link) will aid your understanding.  Other posts in this "Breaking the Market" blog (here) are also helpful in learning more about the four concepts listed above.  Finally, related to #3 above, I am often asked "How do I pick a strike price?".  I plan to address this question further in the near future, hopefully in my next Recommended Reading article on this blog.
  

III.  Is the Stock Market currently "Overvalued"?  According Buffett's favorite indicator, the answer is definitely "YES".

 

 

 

 

 

 

 

 

 

IV.  This video is a short master class in stock selection: Buffett/Munger Video.  Here, the legendary investing team of Warren Buffett and Charlie Munger describe the 4 key filters they use when evaluating whether a particular company is a worthwhile potential investment.  These 4 factors are an important part of the Checklist I now use (see blog post here) when doing my own detailed research on each company I consider as a potential candidate for my Covered Calls Advisor Portfolio. 

Hope you have found worthwhile/useful information in this post.

Regards and Godspeed,

Jeff Partlow
The Covered Calls Advisor
partlow@cox.net

 

March 12th, 2021 Options Expiration -- Bank of America Corp. Covered Calls Position Assigned

The Covered Calls Advisor Portfolio originally had a 1,000 shares Covered Calls position in Bank of America Corp. (BAC).  700 shares were assigned early on March 4th (the day prior to the ex-dividend date) -- see detailed results here: link

The remaining 300 shares of BAC Covered Calls remained in the portfolio until yesterday's March 12th, 2021 options expiration date when the stock finished in-the-money.  So, the Call options expired and the 300 remaining shares were assigned (i.e. sold) at their $34.00 strike price.  As detailed below, the return-on-investment (ROI) result was  +1.5% absolute return (equivalent to +36.1% annualized return-on-investment for the 15 days holding period). 

Bank of America Corp. (BAC) -- Covered Calls Position Assigned at Options Expiration Date

The buy/write transaction was as follows:
02/26/2021 Bought 300 shares of Bank of America Corp. stock @ $35.48 per share 
02/26/2021 Sold 3 BAC March 12th, 2021 $34.00 Call options @ $1.80 per share
Note: The Open Interest in these Calls was 850 contracts and the Implied Volatility was 30.6
03/04/2021 Ex-dividend of $.18 per share
03/12/2021 Today's $34.00 Call options expired in-the-money (stock closed at $37.94 per share), so the 300 BAC shares were assigned (i.e. sold) at the $34.00 strike price.

The overall performance results (including commissions) was as follows:
Covered Calls Cost Basis: $10,106.01
= ($35.48 - $1.80) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$540.00
= ($1.80 * 300 shares)
(b) Dividend Income (BAC shares assigned at 3/12/2021 options expiration): +$54.00
= $.18 per share x 300 shares
(c) Capital Appreciation (Shares above $34.00 strike price at March 12th options expiration): -$444.00
= ($34.00 -$35.48) * 300 shares

Net Profit: +$150.00
= (+$540.00 options income +$54.00 dividend income -$444.00 capital appreciation)

Absolute Return: +1.5%
= +$150.00/$10,106.01
Equivalent Annualized Return: +36.1%
= (+$150.00/$10,106.01)*(365/15 days)

Early Assignment of Merck & Co. Inc. Covered Calls

Surprisingly, the two Merck & Co. Inc. March 26th, 2021 $70.00 Call options were exercised early on the day prior to today's (March 12th) ex-dividend date. The reason this was a surprise to the Covered Calls Advisor was that the owner of these Call options decided to immediately forgo the remaining $.55 time value in the Calls [$4.53 midpoint value of the Call options' $4.15/$4.90 Bid/Ask price - ($73.98 current stock price - $70.00 strike price)] to buy the stock and therefore also capture today's $.65 ex-dividend. 

This is a good outcome for the Covered Calls Advisor since the resulting +39.4% annualized return-on-investment (aroi) achieved is better than the +28.6% maximum possible aroi that might have been achieved later at the options expiration date if the stock was above the $70.00 strike price on the expiration date.  As detailed below, a net profit of $120.00 was achieved in 8 days since the full $568.00 income (profit) received from selling the options exceeded the $448.00 loss in the stock price value.  For any Covered Calls position where there is an ex-dividend date prior to the options expiration date, the Covered Calls Advisor usually prefers to have the stock called away (assigned) early, normally the day prior to the ex-div date.  The reason is that the Covered Calls Advisor's Dividend Capture Strategy spreadsheet was designed to identify positions where the aroi from early assignment is most often greater than what might be achieved if the stock is instead assigned at the options expiration date.  The transactions and detailed results for this position are as follows:

 
Merck & Co. Inc. (MRK) -- Covered Calls Position Closed by Early Assignment

The simultaneous buy/write transaction was as follows:
03/04/2021 Bought 200 shares of Merck & Co. stock @ $72.24 per share 
03/04/2021 Sold 2 MRK March 26th, 2021 $70.00 Call options @ $2.84 per share
Note: The Open Interest in these Calls was 334 contracts and the Implied Volatility was 20.0 when this buy/write transaction executed.
03/11/2021 Owner of the MRK Calls exercised early, so the two MRK March 26th, 2021 $70.00 Call options expired and the 200 Merck shares were sold at the $70.00 strike price.

The overall performance results (including commissions) are as follows:
Covered Call Cost Basis: $13,881.34
= ($72.24 - $2.84) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$568.00
= ($2.84 * 200 shares)
(b) Dividend Income (Merck shares assigned on 3/11/2021, the business day prior to the 3/12/2021 ex-dividend date): = +$0.00
(c) Capital Appreciation (MRK shares assigned early): -$448.00
= ($70.00 -$72.24) * 200 shares

 
Net Profit (Merck shares assigned on 3/11/2021, the day prior to the March 12th ex-dividend date): +$120.00
= (+$568.00 options income +$0.00 dividend income - $448.00 capital appreciation)

 Absolute Return-on-Investment: +0.9%
= +$120.00/$13,388.34
Equivalent Annualized Return-on-Investment: +39.4%
= (+$120.00/$13,388.34)*(365/8 days)

Established Cash-Secured Puts Position in iShares MSCI Emerging Markets ETF

Today, ten 100% Cash-Secured Put options were sold in the iShares MSCI Emerging Markets ETF (ticker EEM) at the March 19th, 2021 $52.00 strike price at $.44 per share when EEM's price was $53.13. This out-of-the-money position has a probability of expiration of 69.9% at the options expiration date. Cash-Secured Puts were sold instead of their comparable Covered Calls in this case.  The time value available was an identical $.44 for either position so the positions (Cash-Secured Puts or Covered Calls) had identical risk/reward profiles.

As detailed below for this EEM 100% Cash-Secured Puts position, there is potential for a +0.8% absolute return in 10 days (equivalent to a +30.7% annualized return-on-investment). 

 

iShares MSCI Emerging Markets ETF (EEM) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
03/10/2021  Sold 10 EEM March 19th, 2021 $52.00 100% Cash-Secured Put options @ $.44 per share.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the ten Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Cost Basis: $51,566.75
= ($52.00 - $.44) * 1,000 shares + $6.70 commission

Net Profit:
(a) Options Income: +$433.30
= ($.44 * 1,000 shares) - $6.70 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EEM is above $52.00 strike price at the March 19th expiration): +$0.00
= ($52.00 - $52.00) * 1,000 shares

Total Net Profit (If EEM is above $52.00 strike price at options expiration): +$433.30
= (+$433.30 option income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +0.8%
= +$433.30/$51,566.75
Annualized Return: +30.7%
= (+$433.30/$51,566.75)*(365/10 days)

The downside 'breakeven price' at expiration is at $51.56 ($52.00 - $.44), which is 3.0% below the current market price of $53.13.

Roll-Up Covered Call in Home Depot Inc.

On February 24th, 2021 the Covered Calls Advisor established a Covered Call in Home Depot Inc. at the March 19th, 2021 $250.00 strike price.  The price of the 100 Home Depot shares has increased from the purchase price of $258.75 to $267.18 this afternoon.

Home Depot goes ex-dividend tomorrow at $1.65 per share and since there was virtually no time value remaining in the Call option, the Covered Calls Advisor decided to roll up from the $250.00 strike to the $260.00 strike at the same March 19th, 2021 options expiration date.  A vertical debit spread transaction was executed at a net debit of $9.24 ($17.04 - $7.80) per share -- so $.76 time value ($260.00 new strike price - $250.00 old strike price - $9.24 net debit) was added to the Covered Call position accompanied by a likelihood that the $1.65 dividend will be captured tomorrow.  

A potential return-on-investment result for this Home Depot Covered Calls position is +2.2% absolute return in 24 days (equivalent to a +33.4% annualized return-on-investment) if the stock price closes above the $260.00 strike price on the March 19th options expiration date. 
By rolling up the original Covered Calls, this result would exceed the +1.9% absolute return (+28.9% annualized) that was the maximum potential roi at expiration of the original Covered Calls position at the $250.00 strike price.  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 positions being at the same options expiration date.

The detailed transactions and a potential result are provided below.   

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.   
03/09/2021 Roll-Up transaction: Bought-to-Close 1 3/19/2021 $250.00 Call option and simultaneously Sold-to-Open 1 3/19/2021 $260.00 Call at a net debit price of $9.24.
03/10/2021 Upcoming quarterly ex-dividend of $1.65 per share


A possible overall performance result (including commissions) for this Home Depot Covered Call position is as follows:
Covered Calls Cost Basis: $24,696.67
= ($258.75 - $11.79) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$252.99
= ($11.79 -$17.04 +$7.80) * 100 shares + $2.01 commissions
(b) Dividend Income (If Home Depot stock assigned at March 19th, 2021 options expiration): +$165.00
= ($1.65 dividend per share x 100 shares)
(c) Capital Appreciation (If shares assigned at $260.00 strike price at options expiration): +125.00
+($260.00 - $258.75) * 100 shares

Total Net Profit: (If Home Depot shares assigned at $260.00 at March 19th, 2021 expiration): +$542.99

= (+$252.99 +$165.00 +$125.00)

Absolute Return-on-Investment (If Home Depot shares assigned on March 19th options expiration date): +2.2%

= +$542.99/$24,696.67

Annualized Return-on-Investment: +33.4%

= (+$542.99/$24,696.67)*(365/24 days)

Continuation of Alibaba Group Holdings Ltd. Covered Calls

Today, two Alibaba Group Holdings Ltd. (BABA) March 19th, 2021 $240.00 Call options were sold at $4.25 to continue Covered Calls for the 200 shares of Alibaba stock owned in the Covered Calls Advisor Portfolio. The price of Alibaba stock was approximately $237.10 this morning when these two Calls were sold. One of the long 100 shares positions was originally from a position at the $250 strike price that expired out-of-the-money and the other 100 shares was from another BABA Covered Call position at the $235 strike price that expired last Friday. The return-on-investment results will be detailed on this blog on March 19th, 2021 when these two options expire.

Recommended Reading -- #3

1. Barry Ritholtz picks Peter Lynch over Warren Buffett or John Templeton as the investor who is the "GOAT" (Greatest Of All Time): https://ritholtz.com/2021/03/peter-lynch-goat/

2. Is this "The Most Important Chart of the Past Decade"?  Maybe 'yes' and maybe 'no'.  But this thought-provoking article pertains to what the current Federal Government spending boom implies for us regarding preparing our investing mindset going forward this year:
https://theirrelevantinvestor.com/2021/03/07/the-most-important-chart-of-the-decade/

3. The discussion about Peter Lynch in article #1 above triggered my memory of an article I wrote on this Covered Calls Advisor blog over a decade ago.  The article references 4 investing-related books that I give my highest praise; so please consider obtaining and reading (or re-reading if you have already read them before): https://coveredcallsadvisor.blogspot.com/2009/01/four-for-your-bookshelf.html

Regards and Godspeed,

Jeff Partlow
The Covered Calls Advisor
partlow@cox.net

March 5th, 2021 Options Expiration Results

The Covered Calls Advisor Portfolio had four positions with March 5th, 2021 options expirations.  Three positions (Applied Materials Inc., Facebook Inc., and Lennar Corporation) closed in-the-money, so the maximum potential return-on-investment results were achieved for these positions.  The results for the three positions that were closed out today were:

• Applied Materials Inc. (AMAT) -- +1.7% absolute return (equivalent to +57.7% annualized roi) for the 11 days of this investment
• Facebook Inc. (FB) -- +1.3% absolute return (equivalent to +30.6% annualized roi) for the 15 days of this investment  
• Lennar Corporation (LEN) -- +4.8% absolute return (equivalent to +33.5% annualized roi) for the 52 days of this investment

The Covered Call position in Alibaba Group Holdings Ltd. at the $235.00 strike price closed out-of-the money at $233.89, so the Call option expired and 100 shares of Alibaba stock now remain in the Covered Calls Advisor Portfolio. 

The cash now available from the assignment (i.e. closing) of these three in-the-money positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  These positions demonstrate that very good return-on-investment results can be achieved with conservative (i.e. moderately in-the-money) Covered Call positions.  Given the Covered Calls Advisor's currently cautious Overall Market outlook, new positions will be hedged by continuing to establish Covered Calls at moderately in-the-money strike prices with good downside protection (that usually being with Deltas greater than 70). 

The detailed transactions and results for these three closed positions are as follows:

1. Applied Materials Inc. (AMAT) -- Covered Calls Position Closed

The transactions were as follows:
02/23/2021 Bought 200 shares of Applied Materials Inc. @ $112.26 per share 
02/23/2021 Sold 2 Applied Materials March 5th, 2021 $108.00 Call options @ $5.89 per share
Note: the Implied Volatility of the Call option was 34.5 when this buy/write limit order was executed. 
02/24/2021 Ex-dividend of $.22 per share
03/05/2021 Today's $108.00 Call option expired in-the-money (stock closed at $113.45 per share), so the 200 AMAT shares were assigned (i.e. sold) at the $108.00 strike price.


The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $21,275.34
= ($112.26 - $5.89) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,178.00
= ($5.89 * 200 shares)
(b) Dividend Income: +$44.00
= $.22 per share x 200 shares 
(c) Capital Appreciation (Applied Materials stock closed above $108.00 strike price at the March 5th options expiration): -$852.00
= ($108.00 -$112.26) * 300 shares

Total Net Profit: +$370.00
= (+$1,178.00 options income +$44.00 dividend income -$852.00 capital appreciation)

Absolute Return-on-Investment: +1.7%
= +$370.00/$21,275.34
Equivalent Annualized Return-on-Investment: +57.7%
= (+$370.00/$21,275.34)*(365/11 days)

2. Facebook Inc. (FB) -- Covered Call Position Closed

The Covered Calls Advisor's buy/write limit order was transacted as follows:
02/19/2021 Bought 100 Facebook shares @ $260.25
02/19/2021 Sold 1 Facebook 3/05/2021 $250.00 Call option @ $13.35. 
03/05/2021 Today's $250.00 Call option expired in-the-money (stock closed at $264.28 per share), so the 100 FB shares were assigned (i.e. sold) at the $250.00 strike price.

The overall performance result (including commissions) for this Facebook Inc. Covered Call position was as follows:
Covered Call Cost Basis: $24,690.67
= ($260.25 - $13.35) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$1,335.00
= ($13.35 * 100 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (FB shares assigned at $250.00 strike price at March 5th, 2021 options expiration): -$1,025.00
+($250.00 - $260.25) * 100 shares

 Total Net Profit: +$310.00

= (+$1,335.00 option income +$0.00 dividend income -$1,025.00 capital appreciation)

Absolute Return: +1.3%

= +$310.00/$24,690.67

Annualized Return-on-Investment: +30.6%

= (+$310.00/$24,690.67)*(365/15 days)

3. Lennar Corp. (LEN) -- Covered Calls Position Closed
The buy/write transaction was:
01/13/2021 Bought 200 Lennar Corp. shares @ $76.39
01/13/2021 Sold 2 LEN 01/29/2021 $72.50 Call options @ $4.96
Note: the Implied Volatility of the Call options was 37.5 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 73.3.
01/20/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 LEN Jan. 29th, 2021 $72.50 Call options at $11.18 per share and simultaneously Sold-to-Open 2 LEN February 19th, 2021 $77.50 Calls at $7.50 per share. This roll-up-and-out transaction occurred at a net debit of $3.68 ($11.18 - $7.50) per share and the price of Lennar's stock was $83.58 when this transaction was executed.
01/28/2021 Quarterly ex-dividend of $.25 per share
02/08/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 LEN Feb. 19th, 2021 $77.50 Call options at $17.45 per share and simultaneously Sold-to-Open 2 LEN March 5th, 2021 $85.00 Calls at $10.75 per share. This roll-up-and-out transaction occurred at a net debit of $6.70 ($10.75 - $17.45) per share and the price of Lennar's stock was $94.85 when this transaction was executed.
03/05/2021 Today's two LEN $85.00 Call options expired in-the-money (stock closed at $85.98 per share), so the 200 LEN shares were assigned (i.e. sold) at the $85.00 strike price.

The overall performance result (including commissions) for this Lennar Corp. Covered Calls position is as follows:
Covered Calls Cost Basis: $14,287.34
= ($76.39 - $4.96) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: -$1,089.36
= ($4.96 -$11.18 + $7.50 -$17.45 +$10.75) * 200 shares - $5.36 commissions
(b) Dividend Income (Lennar stock assigned at the March 5th, 2021 options expiration): +$50.00
= ($.25 dividend per share x 200 shares)

(c) Capital Appreciation: +$1,722.00
+($85.00 - $76.39) * 200 shares

Total Net Profit (Lennar shares assigned at $85.00 at March 5th, 2021 expiration): +$682.64

= (-$1,089.36 +$50.00 +$1,722.00)

Absolute Return: +4.8%

= +$682.64/$14,287.34

Annualized Return-on-Investment: +33.5%

= (+$682.64/$14,287.34)*(365/52 days)

Please email me at partlow@cox.net with any questions or comments related specifically to this post or whenever you have comments or questions related to Covered Calls investing.

Best Wishes and Godspeed,
Jeff Partlow

Established Covered Calls in Merck & Co. Inc. Using Dividend Capture Strategy

Today, a Covered Call position was established in Merck & Co. Inc. (ticker MRK) with the purchase of 200 shares at $72.24 per share and two March 26th, 2021 Call options were sold for $2.84 per share at the $70.00 strike price.  A moderately in-the-money Covered Calls positions was established with the Delta of the Calls at 71.0 when this buy/write transaction was executed, which approximates the probability of assignment on the March 26th, 2021 options expiration date.  Merck goes ex-dividend at $.65 per share (3.6% dividend yield at the current stock price) on March 12th which is prior to the March 26th options expiration date, so this dividend is included in the potential return-on-investment results shown below.  All nine criteria in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet were met for this position and there is no quarterly earnings report prior to the options expiration date. 

Two potential return-on-investment results are: (a) +0.9% absolute return (equivalent to +39.4% annualized return for the next 8 days) if the stock is assigned early (on the last trading day prior to the March 12th, 2021 ex-dividend date); OR (b) +1.8% absolute return (equivalent to +28.6% annualized return over the next 23 days) if the stock is assigned on the March 26th options expiration date. 

Merck & Co. Inc. (MRK) -- New Covered Calls Position

The simultaneous buy/write transaction was as follows:
03/04/2021 Bought 200 shares of Merck & Co. stock @ $72.24 per share 
03/04/2021 Sold 2 MRK March 26th, 2021 $70.00 Call options @ $2.84 per share
Note: The Open Interest in these Calls was 334 contracts and the Implied Volatility was 20.0 when this buy/write transaction executed.
03/12/2021 Upcoming ex-dividend of $.65 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Call Cost Basis: $13,881.34
= ($72.24 - $2.84) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$568.00
= ($2.84 * 200 shares)
(b) Dividend Income (If Merck shares assigned on 3/11/2021, the business day prior to the 3/12/2021 ex-dividend date): = +$0.00; or
(b) Dividend Income (If Merck shares assigned at 3/26/2021 options expiration): +$130.00
= $.65 per share x 200 shares
(c) Capital Appreciation (If MRK shares assigned early on 3/11/2021): -$448.00
= ($70.00 -$72.24) * 200 shares; or
(c) Capital Appreciation (If MRK shares assigned with stock above $70.00 strike price at March 26th options expiration): -$448.00
= ($70.00 -$72.24) * 200 shares

1. Potential Net Profit (If Merck shares assigned on 3/11/2021, the day prior to the March 12th ex-dividend date): +$120.00
= (+$568.00 options income +$0.00 dividend income - $448.00 capital appreciation)
2. Potential Net Profit (If MRK price is above $70.00 strike price at March 26th options expiration): +$250.00
= (+$568.00 options income +$130.00 dividend income - $448.00 capital appreciation)

1. Absolute Return (If Merck shares assigned early on 3/11/2021, the day prior to the March 12th ex-dividend date): +0.9%
= +$120.00/$13,388.34
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +39.4%
= (+$120.00/$13,388.34)*(365/8 days)
2. Absolute Return (If Merck price is above $70.00 strike price at March 26th options expiration): +1.8%
= +$250.00/$13,881.34
Equivalent Annualized Return (If assigned on 3/26/2021 options expiration date): +28.6%
= (+$250.00/$13,881.34)*(365/23 days)

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 Merck & Co. Inc. Covered Call position.