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
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)
