There is an upcoming ex-dividend of $.45 per share (a 3.0% annualized dividend yield) on May 13th. Two potential return-on-investment results for this position are detailed below (including the possibility of early exercise since the ex-dividend is prior to the May 21st options expiration date). Given the Covered Calls Advisor's current Overall Market Meter outlook, a conservative in-the-money Covered Calls position was established -- the Delta was 69.0, which approximates the probability that the Call options will be in-the-money on the options expiration date. There is no earnings report prior to the May 21st options expiration date.
Truist is a large regional bank in the Mid-Atlantic and Southeast U.S. that resulted from the merger in December 2019 of BB&T and SunTrust Bank. Earnings have exceeded analysts' estimates every quarter since the merger and 2021 earnings per share are estimated at $4.62 which is 21% above the 2020 actual results and a forward P/E ratio of only 12.7 based on today's purchase price. For banks, the Covered Calls Advisor likes to consider Price/Book Value and Truist is currently priced at a reasonable P/BV valuation of 1.18. In addition, it should continue to benefit from both GDP growth and higher net interest margins this year compared with the very low interest rates during comparable quarters last year.
As detailed below, two potential return-on-investment results are:
- +0.9% absolute return (equivalent to +37.0% annualized return for the next 9 days) if the stock is assigned early (business day prior to the May 13th ex-dividend date); OR
- +1.7% absolute return (equivalent to +34.5% annualized return over the next 18 days) if the stock is assigned on the May 21st options expiration date.
Truist Financial Corporation (TFC) -- New Covered Calls Position
The buy/write transaction was:
5/04/2021 Sold 3 TFC 5/21/2021 $57.50 Call options @ $1.90
Note: the Time Value (aka Extrinsic Value) in the Call options was $.52 per share = [$1.90 Call options premium - ($58.88 stock price - $57.50 strike price)]
5/13/2021 Upcoming quarterly ex-dividend of $.45 per share
Two possible overall performance results (including commissions) for this Truist Financial Covered Calls position are as follows:
Covered Calls Cost Basis: $17,096.01
= ($58.88 - $1.90) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$570.00
= ($1.90 * 300 shares)
(b) Dividend Income (If options exercised early on May 12th, the business day prior to the May 13th ex-div date): +$0.00; or
(b) Dividend Income (If Truist Financial stock assigned at May 21st, 2021 expiration): +$135.00
= ($.45 dividend per share x 300 shares)
(c) Capital Appreciation (If TFC Call options assigned early): -$414.00
+($57.50 - $58.88) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $57.50 strike price at options expiration): -$414.00
+($57.50 - $58.88) * 300 shares
+($57.50 - $58.88) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $57.50 strike price at options expiration): -$414.00
+($57.50 - $58.88) * 300 shares
1. Total Net Profit [If option exercised on May 12th (business day prior to May 13th ex-dividend date)]: +$156.00
= (+$570.00 options income +$0.00 dividend income -$414.00 capital appreciation); or
2. Total Net Profit (If Truist shares assigned at $57.50 strike price at May 21st, 2021 expiration): +$291.00
= (+$570.00 options income +$135.00 dividend income -$414.00 capital appreciation)
1. Absolute Return (If option exercised early on May 12th): +0.9%
= +$156.00/$17,096.01
Annualized Return (If option exercised early on May 12th): +37.0%
= (+$156.00/$17,096.01) * (365/9 days); or
2. Absolute Return (If Truist shares assigned at $57.50 at May 21st, 2021 options expiration): +1.7%
= +$291.00/$17,096.01
Annualized Return (If TFC shares assigned at $57.50 at May 21st, 2021 expiration): +34.5%
= (+$291.00/$17,096.01)*(365/18 days)
Either outcome provides an attractive return-on-investment result for this Truist Financial investment. These returns will be achieved as long as the stock is above the $57.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $56.53 ($58.88 -$1.90 -$.45) provides 4.0% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this Truist Financial position, all nine criteria were met.
