Established Covered Calls in Morgan Stanley Using Dividend Capture Strategy

Today a Covered Calls position was established in Morgan Stanley (ticker symbol MS) when 200 shares were purchased at $88.42 and 2 August 6th, 2021 Call options were sold at $3.56 per share at the $86.00 strike price.  The net debit limit order at $84.86 was executed, so the time value was $1.14 per share [$3.56 Call options premium - ($88.42 stock purchase price - $86.00 strike price)]. There is an upcoming quarterly ex-dividend of $.70 (annual dividend yield of 3.2%) on July 29th., so potential return-on-investment results for this position, as detailed below, include the possibility of early assignment because the ex-dividend is prior to the August 6th, 2021 options expiration date.  As preferred by the Covered Calls Advisor, the next quarterly earnings report is after the options expiration date.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, an in-the-money Covered Calls position was established with a Delta of 68.1. 

As detailed below, two potential return-on-investment results are: 

•  +1.3% absolute return (equivalent to +49.0% annualized return for the next 10 days) if the stock is assigned early (business day prior to the July 29th ex-dividend date); OR 

• +2.2% absolute return (equivalent to +41.7% annualized return over the next 19 days) if the stock is assigned on the August 6th options expiration date.

Morgan Stanley (MS) -- New Covered Calls Position
The buy/write transaction was:
07/19/2021 Bought 200 Morgan Stanley shares @ $88.42
07/19/2021 Sold 2 Morgan Stanley 08/06/2021 $86.00 Call options @ $3.56
Note: the Implied Volatility of the Call options was 26.8 when this buy/write transaction was executed.
07/29/2021 Upcoming quarterly ex-dividend of $.70 per share

Two possible overall performance results (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $16,973.34
= ($88.42 - $3.56) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$712.00
= ($3.56 * 200 shares)
(b) Dividend Income (If option exercised early on July 28th, the business day prior to the July 29th ex-div date): +$0.00; or
(b) Dividend Income (If Morgan Stanley stock assigned at Aug. 6th, 2021 expiration): +$140.00
= ($.70 dividend per share x 200 shares)

(c) Capital Appreciation (If Morgan Stanley Call options assigned early on July 28th): -$484.00
+($86.00 - $88.42) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $86.00 strike price at Aug. 6th options expiration): -$484.00
+($86.00 - $88.42) * 200 shares

1. Total Net Profit [If option exercised on July 28th (business day prior to July 29th ex-dividend date)]: +$228.00

= (+$712.00 options income +$0.00 dividend income -$484.00 capital appreciation); or

2. Total Net Profit (If Morgan Stanley shares assigned at $86.00 strike price at August 6th, 2021 expiration): +$368.00

= (+$712.00 +$140.00 -$484.00)

1. Absolute Return (If option exercised early on July 28th): +1.3%

= +$228.00/$16,973.34

Annualized Return (If option exercised early): +49.0%

= (+$228.00/$16,973.34)*(365/10 days); or

2. Absolute Return (If Morgan Stanley shares assigned at $86.00 at August 6th, 2021 options expiration): +2.2%

= +$368.00/$16,973.34

Annualized Return (If Morgan Stanley shares assigned at $86.00 at Aug 6th, 2021 expiration): +41.7%

= (+$368.00/$16,973.34)*(365/19 days)

Either outcome would provide a very attractive return-on-investment result for this Morgan Stanley investment.  These returns will be achieved as long as the stock is above the $86.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $84.16 ($88.42 -$3.56 -$.70) provides 4.8% 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 Morgan Stanley position, all nine criteria were met.