Today a Covered Calls position was established in Devon Energy Corp. (ticker symbol DVN) when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $24.75 and 4 June 18th, 2021 Call options were sold at $3.30 per share at the $22.00 strike price. Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, a moderately in-the-money Covered Calls position was established -- the Delta was 77.4, which closely approximates the probability that the Call options will be in-the-money on the options expiration date.
Devon recently announced an upcoming fixed-plus-variable-ex-dividend of $.34 ($.11 fixed plus $.23 variable) per share on June 11th which in total is a 13% increase above its prior quarterly dividend payout. It provides a total cash return dividend of 5.5% at the current stock price of $24.75, which is well above even the shareholder yield (that includes buybacks) of its Energy sector peers and also the large-cap broader market. This fixed-plus-variable dividend is the first of its kind among Energy companies with the variable amount based on up to a 50% distribution of Devon's quarterly excess free cash flow. Potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the June 18th options expiration date.
Devon Energy is a leading independent oil and gas Exploration and Production (E&P) company with a strong presence in the Permian Basin area of West Texas. It is now a 'Strong Buy' based on the ratings of the 31 analysts currently following it and their average target price is $32.30 which is +30.5% above today's $24.75 purchase price. Also, Devon is the recent 'Top Pick' in the large-cap energy sector by Credit Suisse. Devon's stock is currently also attractively priced based on traditional energy company valuation metrics since based on current 2022 financial estimates, its EV/EBITDX of 5.0x and its NAV of 0.8x are both well below that of its peers. Finally, Devon's Q1 2021 report was recently announced (two weeks ago) and they exceeded analysts' eps estimates by +36.4% ($.45 actual versus $.33 estimates).
As detailed below, two potential return-on-investment results are:
- +2.6% absolute return (equivalent to +40.7% annualized return-on-investment for the next 23 days) if the stock is assigned early (business day prior to the June 11th ex-dividend date); OR
- +4.1%
absolute return (equivalent to +48.8% annualized return over the next 31
days) if the stock is assigned on the June 18th options expiration date.
Devon Energy Corp. (DVN) -- New Covered Calls Position
The buy/write transaction was:
05/19/2021 Bought 400 Devon Energy Corp. shares @ $24.7505/19/2021 Sold 4 DVN 6/18/2021 $22.00 Call options @ $3.30
Note 1: the Implied Volatility of the Calls was 51.2 when this transaction executed.
Note 2: the Time Value (aka Extrinsic Value) in the Call options was $.55 per share = [$3.30 Call options premium - ($24.75 stock price - $22.00 strike price)]
06/11/2021 Upcoming quarterly fixed-plus-variable-dividend of $.34 per share
Two possible overall performance results (including commissions) for this Devon Energy Covered Calls position are as follows:
Covered Calls Cost Basis: $8,582.68
= ($24.75 - $3.30) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,320.00
= ($3.30 * 400 shares)
(b) Dividend Income (If options exercised early on June 10th, the business day prior to the June 11th ex-div date): +$0.00; or
(b) Dividend Income (If Devon Energy stock assigned at June 18th, 2021 expiration): +$136.00
= ($.34 dividend per share x 400 shares)
+($22.00 - $24.75) * 400 shares; or
(c) Capital Appreciation (If DVN shares assigned at $22.00 strike price at June 18th options expiration): -$1,100.00
+($22.00 - $24.75) * 400 shares
= (+$356.00/$8,582.68)*(365/31 days)
Either outcome provides a very attractive return-on-investment result for this Devon Energy Corp. investment. These returns will be achieved as long as the stock is above the $22.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $21.11 ($24.75 -$3.30 -$.34) provides 14.7% 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 Devon Energy Corp. position, all nine criteria were met.
