Establish Covered Calls Position in Diamondback Energy Inc.

Today, a Covered Calls position was established in Diamondback Energy Inc. (ticker FANG) with the purchase of 200 shares at $80.73 per share and two May 21st, 2021 Call options were sold for $6.61 per share at the $75.00 strike price.  This transaction occurred at simultaneous buy/write transaction at a net debit of $74.12 per share.  The corresponding time value (aka extrinsic value) in the Call options was $.88 per share = [$6.61 Call options premium received - ($80.73 stock purchase price - $75.00 options strike price)].  A moderately in-the-money Covered Calls positions was established with the Delta of the Calls at approximately 77.0 when this buy/write transaction was executed, which approximates the probability of assignment on the May 21st, 2021 options expiration date. 

Diamondback Energy goes ex-dividend at $.40 per share (2.0% annualized dividend yield at the current stock price) on May 12th which is prior to the May 21st options expiration date, so this dividend is included in the potential return-on-investment results shown below.  Also shown below, eight of the nine criteria in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet were met for this position and the next quarterly earnings report on April 30th, 2021 is after the April 23rd options expiration date. 

Diamondback's Q1 2021 earnings were reported 4 days ago and exceeded analysts estimates by +28%.  Consequently, current year eps estimates have now adjusted up to $8.34 per share (a P/E ratio of only 9.7) with further earnings increases expected for the following year.   Analysts remain bullish on Diamondback Energy with twenty-six of thirty analysts rating it as either a 'Buy' or 'Outperform'.  The other four analysts rate it as 'Neutral' and none rate it as 'Underperform' or 'Sell'.  


As shown below, two potential return-on-investment result are: (1) +1.2% absolute return in 5 days (equivalent to a +86.0% annualized return-on-investment if FANG stock is assigned at $75.00 on the day prior to the May 12th ex-dividend date; OR (2) +1.7% absolute return in 15 days (equivalent to a +41.8% annualized return-on-investment if assigned at the May 21st expiration.


Diamondback Energy Inc. (FANG) -- New Covered Calls Position

The transactions were as follows:
05/7/2021 Bought 200 shares of Diamondback stock @ $80.73 per share 
05/7/2021 Sold 2 Diamondback May 21st, 2021 $75.00 Call options @ $6.61 per share
Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of the Call options was 38.6.
5/12/2021 Upcoming ex-dividend of $.40 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $14,825.34
= ($80.73 - $6.61) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,320.66
= ($6.61 * 200 shares) - $1.34 commission
(b) Dividend Income (If Diamondback stock assigned on day prior to May 12th ex-dividend date): +$0.00; OR
(b) Dividend Income (If Diamondback stock assigned on May 21st options expiration date): $80.00
= $.40 dividend per share x 200 shares
(c) Capital Appreciation (If FANG stock is assigned at $75.00 on the day prior to the May 12th ex-dividend date): -$1,146.00
= ($75.00 -$80.73) * 200 shares; OR
(c) Capital Appreciation (If FANG stock is above $75.00 strike price at the May 21st expiration): -$1,146.00
= ($75.00 -$80.73) * 200 shares

1.  Total Net Profit (If FANG stock assigned on day prior to May 12th ex-dividend date): +$174.66
= (+$1,320.66 options income +$0.00 dividend income -$1,146.00 capital appreciation): OR
2.  Total Net Profit (If stock assigned on May 21st options expiration date): +$254.66
= (+$1,320.66 options income +$80.00 dividend income -$1,146.00 capital appreciation)

1.  Absolute Return (If FANG stock assigned on day prior to May 12th ex-dividend date): +1.2%
= +$174.66/$14,825.34
Equivalent Annualized Return: +86.0%
= (+$174.66/$14,825.34) * (365/5 days); OR
2.  Absolute Return (If stock assigned on May 21st options expiration date): +1.7%
= +$254.66/$14,825.34
Equivalent Annualized Return: +41.8%
= (+$254.66/$14,825.34)*(365/15 days)


Either outcome would provide a very good return-on-investment result.  These returns will be achieved as long as the stock is above the $75.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $73.72 ($80.73 -$6.61 -$.40) provides 8.7% downside protection below today's purchase price.

Using the Cox-Ross-Rubinstein Options Pricing Model, the probability of making a profit (if held until the May 21st options expiration) for this Diamondback Energy Covered Calls position is 77.0%, so the approximate expected value annualized ROI of this investment (if held until expiration) is +32.2% (+41.8% *  77.0%), a very good result for this in-the-money Covered Calls position, especially given that there is no earnings report volatility prior to the options expiration date.

The Covered Calls Advisor has established a set of nine criteria to evaluate potential Covered Calls using a Dividend Capture Strategy.  The minimum threshold desired to establish a position is that at least eight of these nine criteria must be achieved which is the case for this Diamondback Energy position, as shown in the chart below.