Today, a Covered Calls position was established in Qualcomm Inc. (ticker QCOM) with the purchase of 200 shares at $128.09 per share and two June 18th, 2021 Call options were sold for $9.71 per share at the $120.00 strike price. This transaction occurred at simultaneous buy/write transaction at a net debit of $118.38 per share. The corresponding time value (aka extrinsic value) in the Call options was $1.62 per share = [$9.71 Call options premium received - ($128.09 stock purchase price - $120.00 options strike price)]. A moderately in-the-money Covered Calls positions was established with the Delta of the Calls at approximately 76.1 when this buy/write transaction was executed, which approximates the probability of assignment on the June 18th, 2021 options expiration date.
Qualcomm Inc. goes ex-dividend at $.68 per share (2.1% annualized dividend yield at the current stock price) on June 2nd which is prior to the June 18th 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 July 28th, 2021 is after the June 18th options expiration date.
Qualcomm appeared on the Covered Calls Advisor's PEG Ratio screener with its future 3-5 years earnings growth rate exceeding FY2021's estimated P/E Ratio of 16.4 based on the current stock price. The Covered Calls Advisor
believes that the softness in the stock price during the past three months
is unwarranted especially given that the most recent quarterly earnings report exceeded analysts' estimates by 14%. Also, the average target price of 33 analysts currently covering Qualcomm Inc. is $171.35 (33.8% above today's purchase price).
As shown below, two potential return-on-investment result are: (1) +1.4% absolute
return in 16 days (equivalent to a +31.1% annualized
return-on-investment if QCOM stock is assigned at $120.00 on the day prior to the June 2nd ex-dividend date; OR (2) +1.9% absolute
return in 33 days (equivalent to a +21.4% annualized
return-on-investment if assigned at the June 18th expiration.
The transactions were as follows:
05/17/2021 Bought 200 shares of Qualcomm stock @ $128.09 per share
05/17/2021 Sold 2 Qualcomm June 18th, 2021 $120.00 Call options @ $9.71 per share
Note: this was a simultaneous Buy/Write transaction and the Implied Volatility of the Call options was 32.0.
06/02/2021 Upcoming ex-dividend of $.68 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $23,677.34
= ($128.09 - $9.71) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,940.66
= ($9.71 * 200 shares) - $1.34 commission
(b) Dividend Income (If Qualcomm stock assigned on day prior to June 2nd ex-dividend date): +$0.00; OR
(b) Dividend Income (If Qualcomm stock assigned on June 18th options expiration date): $136.00
= $.68 dividend per share x 200 shares
(c) Capital Appreciation (If Qualcomm stock is assigned at $120.00 on the day prior to the June 2nd ex-dividend date): -$1,618.00
= ($120.00 - $128.09) * 200 shares; OR
(c) Capital Appreciation (If Qualcomm stock is above $120.00 strike price at the June 18th expiration): -$1,618.00
= ($120.00 - $128.09) * 200 shares
1. Total Net Profit (If Qualcomm stock assigned on day prior to June 2nd ex-dividend date): +$322.66
= (+$1,940.66 options income +$0.00 dividend income -$1,618.00 capital appreciation): OR
2. Total Net Profit (If stock assigned on June 18th options expiration date): +$458.66
= (+$1,940.66 options income +$136.00 dividend income -$1,618.00 capital appreciation)
1. Absolute Return (If QCOM stock assigned on day prior to June 2nd ex-dividend date): +1.4%
= +$322.66/$23,677.34
Equivalent Annualized Return: +31.1%
= (+$322.66/$23,677.34) * (365/16 days); OR
2. Absolute Return (If Qualcomm stock assigned on June 18th options expiration date): +1.9%
= +$458.66/$23,677.34
Equivalent Annualized Return: +21.4%
= (+$458.66/$23,677.34)*(365/33 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 $120.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $117.70 ($128.09 -$9.71 -$.68) provides 8.1% 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 Qualcomm Covered Calls position is 76.1%, so the approximate expected value annualized ROI of this investment (if held until expiration) is +16.3% (+21.4% * 76.1%), a satisfactory result for this in-the-money Covered Calls position, especially given that there are a higher than normal number of days (33) until the options expiration date. Also, there is no earnings report uncertainty built into the Implied 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 Qualcomm Inc. position, and eight criteria were met in this case (as shown in the chart below).
