Early this morning, the Covered Calls Advisor received notification from my broker (Schwab) that two Covered Calls positions [Bank of America Corp. (BAC) and Rio Tinto PLC (RIO)] were exercised early by the Call option owners.
The Bank of America position was a partial early assignment since 7 of the 10 Covered Calls were assigned -- and 3 Covered Calls remain in the Covered Calls Advisor Portfolio. I was pleased but also somewhat surprised by the early assignment:
(1) "Pleased" because the annualized return-on-investment (aroi) for
the early assignment of +57.8% is much greater than the +36.1% aroi if the Covered Calls would have remained in-the-money at their March 12th, 2021 options expiration date and instead have been assigned then.
(2) "Somewhat Surprised" because the Call owners chose to immediately forgo the remaining time of $.09 per share [$2.51 midpoint of the Call options' $2.38/$2.64 bid/ask spread - ($36.42 stock price - $34.00 strike price)] with only 7 trading days remaining until the options expiration.
Early Assignment of the two Rio Tinto Covered Calls was expected since there was a large ex-dividend today and virtually no time value remaining in the Calls. Yesterday afternoon, I looked at potentially rolling out the Calls in order to capture the dividend, but decided the opportunities available were not sufficiently attractive; so the decision was made to allow for the early assignment, take the profit, and now look to move on to a new position in a different company.
As detailed below, the return-on-investment results were as follows:
- Bank of America Inc. -- +0.9% absolute return (equivalent to +57.8% annualized return-on-investment for the 6 days this position was held); and
- Rio Tinto PLC -- +1.1% absolute return (equivalent to +27.5% annualized roi for the 14 days
this position was held)
1. Bank of America Corp. (BAC) -- Covered Calls Position Closed by Early Assignment
The buy/write transaction was as follows:
02/26/2021 Bought 1,000 shares of Bank of America Corp. stock @ $35.48 per share
02/26/2021 Sold 10 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 Seven BAC March 12th, 2021 Call options exercised early so the Calls expired worthless and 700 shares of BAC stock was sold at the $34.00 strike price.
Note: 3 Covered Calls remain in the Covered Calls Advisor Portfolio
The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $23,580.69
= ($35.48 - $1.80) * 700 shares + $4.69 commission
Net Profit Components:
(a) Options Income: +$1,260.00
= ($1.80 * 700 shares)
(b) Dividend Income (700 BAC shares assigned on 3/3/2021, the business day prior to the 3/4/2021 ex-dividend date): = +$0.00
(c) Capital Appreciation (BAC shares assigned early): -$1,036.00
= ($34.00 -$35.48) * 700 shares
Net Profit (700 Bank of America shares assigned on 3/3/2021, the day prior to the March 4th ex-dividend date): +$224.00
= (+$1,260.00 options income +$0.00 dividend income - $1,036.00 capital appreciation)
Absolute Return: +0.9%
= +$224.00/$23,580.69
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +57.8%
= (+$224.00/$23,580.69)*(365/6 days)
2. Rio Tinto PLC (RIO) -- Covered Calls Position Closed by Early Assignment
02/18/2021 Bought 200 Rio Tinto shares @ $87.38
02/18/2021 Sold 2 RIO 3/19/2021 $82.50 Call options @ $5.74
Note: the Implied Volatility of the Call options was 26.8 when this transaction was executed.
03/04/2021 Two RIO March 19th, 2021 $82.50 Call options exercised early, so the 200 shares of RIO were sold at the $82.50 strike price.
The overall performance results (including commissions) for this Rio Tinto Covered Calls position are as follows:
Covered Calls Cost Basis: $16,329.34
= ($87.38 - $5.74) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,148.00
= ($5.74 * 200 shares)
(b) Dividend Income (Both options exercised early on March 3rd, the business day prior to the March 4th ex-div date): +$0.00
= +($82.50 - $87.38) * 200 shares
