A Covered Call position was established in United Parcel Service Inc. (ticker UPS) with an August 27th, 2021 options expiration date. A buy/write transaction at the net debit limit order price of $186.28 executed when 100 shares of UPS were purchased at $191.25 and one August 27th, 2021 Call option at the $187.50 strike price was sold at $4.97 per share. The net debit limit order was at $186.28, so the time value was $.1.22 per share [$4.97 Call option premium - ($191.25 stock purchase price - $187.50 strike price)].
There is an upcoming quarterly ex-dividend of $1.02 (annual dividend yield of 2.1%) on August 20th, so potential return-on-investment results for this position, as detailed below, include the possibility of early assignment since the ex-dividend is prior to the August 27th, 2021 options expiration date. As preferred by the Covered Calls Advisor, 2nd quarter earnings were announced two weeks ago so the next quarterly earnings report will be after the August 27th options expiration date. Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, a moderately in-the-money Covered Calls position was established with a Delta of 75.7 which approximates a probability of 75.7% that the stock will be in-the-money at the options expiration date.
As detailed below, two potential return-on-investment results are: +0.7% absolute return (equivalent to +26.4% annualized return for the next 9 days) if the stock is assigned early (business day prior to the August 20th ex-date); OR +1.2% absolute return (equivalent to +25.7% annualized return for the next 17 days) if the stock is assigned on the August 27th options expiration date.
United Parcel Service Inc. (UPS) -- New Covered Call Position
08/11/2021 Bought 100 UPS shares @ $191.25
08/11/2021 Sold 1 UPS 8/27/2021 $187.50 Call option @ $4.97 per share 08/20/2021 Upcoming quarterly ex-dividend of $1.02 per share
Two possible overall performance results (including commissions) for this UPS Covered Call position are as follows:
Covered Call Cost Basis: $18,628.67
= ($191.25 - $4.97) * 100 shares + $.67 commissions
Net Profit Components:
(a) Option Income: +$496.33
= ($4.97 * 100 shares) - $.67 commissions
(b) Dividend Income (If option exercised early on the business day prior to the Aug 20th ex-div date): +$0.00; or
(b) Dividend Income (If UPS shares assigned at August 27th, 2021 options expiration): +$102.00
= ($1.02 dividend per share x 100 shares)
(c) Capital Appreciation (If UPS assigned early on August 20th): -$375.00
+($187.50 -$191.25) * 100 shares ;or
(c) Capital Appreciation (If UPS shares assigned at $187.50 strike price at options expiration): -$375.00
+($187.50 -$191.25) * 100 shares
Either outcome would provide an excellent return-on-investment result. These returns will be achieved as long as the stock is above the $187.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $185.26 ($191.25 -$4.97 -$1.02) provides 3.1% downside protection below today's purchase price.
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. As shown in the table below, eight criteria are achieved for this United Parcel Service Inc. Covered Call position.
