As preferred by the Covered Calls Advisor, Signet's Q3 earnings report on December 2nd, 2021 will be after the November 19th, 2021 monthly options expiration date. Given the Covered Calls Advisor's current cautious market outlook, an in-the-money Covered Calls position was established with a Delta of 68.5 (a 68.5% probability of assignment) when the buy/write limit order was executed.
Signet is the largest specialty retail jeweler and it serves the middle to upper-middle market with its Zales, Kay, and Jared brands among others. Under the visionary leadership of Gina Drosos (CEO since 2017 and on the Board of Directors since 2012), the company is now thriving both in its primary mall-based locations but also in its growing digital e-commerce business. What triggered my purchase today was the announcement of its $490 million cash purchase agreement of Diamonds Direct and their simultaneous announcement of increased current year revenue and net income guidance which comes only 5 weeks after they raised guidance as part of their Q2 earnings report.
Signet has an attractive valuation since its P/E Ratio based on the average estimates for Current FY is only about 8.0 compared with its estimated future revenue growth rate of 8%. The average target price of the five analysts that cover Signet is $90.00 (+12.3% above today's stock purchase price).
As detailed below, a potential return-on-investment result is +4.4% absolute return (equivalent to +94.9% annualized
return for the next 17 days) if the stock is assigned early (business day
prior to the October 28th ex-dividend date); OR +4.7%
absolute return (equivalent to +43.7% annualized return over the next 39
days) if the stock is assigned on the November 19th, 2021 options expiration date.
Signet Jewelers Ltd. (SIG) -- New Covered Calls Position
The simultaneous buy/write transaction today was as follows:
10/12/2021 Bought 200 Signet Jewelers shares @ $80.12
10/12/2021 Sold 2 Signet 11/19/2021 $75.00 Call options @ $8.30
Note: the Implied Volatility of the Calls was 50.2 when this transaction was executed, well above the S&P 500 Volatility Index (VIX) of 19.5.
10/28/2021 Upcoming quarterly ex-dividend of $.18 per share
Two possible overall performance results (including commissions) for this Signet Covered Calls position are as follows:
Covered Calls Cost Basis: $14,365.34
= ($80.12 - $8.30) * 200 shares + $1.34 commissions
Net Profit Components:
(a) Options Income: +$1,658.66
= ($8.30 * 200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on the business day prior to the Oct. 28th ex-div date): +$0.00; or
(b) Dividend Income (If Signet shares assigned at the Nov. 19th, 2021 options expiration): +$36.00
= ($.18 dividend per share x 200 shares)
(c) Capital Appreciation (If Signet shares assigned early on Oct. 27th -- day prior to the ex-div date): -$1,024.00
+($75.00 - $80.12) * 200 shares ;or
(c) Capital Appreciation (If Signet shares assigned at $75.00 strike price at options expiration): -$1,024.00
+($75.00 - $80.12) * 200 shares
These returns will be achieved as long as the Signet stock is above the $75.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $71.64 ($80.12 -$8.30 -$.18) provides 10.6% 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 met for this Signet Jewelers Corporation Covered Calls position.
