Covered Calls Position Established in Discovery Inc.

Today a Covered Calls position was established in Discovery Inc. (ticker symbol DISCA) when the Covered Calls Advisor's buy/write limit order was executed.  Five hundred shares were purchased at $25.80 and five November 19th, 2021 Call options were sold at $1.34 at the $25.00 strike price.  The time value when this Covered Call was established was $.54 per share = [$1.34 Call option price - ($25.80 stock price - $25.00 strike price)], so the downside breakeven price is $24.46 ($25.00 strike price - $.54 time value).  Given the Covered Calls Advisor's current cautious outlook, an in-the-money Covered Calls position was established with the Delta at 65.8, which approximates a probability of 65.8% that the Call option will be in-the-money on the options expiration date. 

Discovery Inc. has agreed to merge with AT&T's Warner Media and will most likely be approved to become Warner Bros. Discovery, hopefully in mid-2022 which will likely catapult them into third position (behind only Netflix and Disney) in the streaming entertainment media industry.  It is difficult to determine when investors will appreciate the growth potential of Discovery given the uncertainty around the merger and its timing.  But if the merger is approved by regulators (which the Covered Calls Advisor believes is likely), the stock would likely be much higher than its current price.  Discovery had an earnings per share miss on their just released Q3 2021 earnings report and Discovery's stock has been in a recent decline in anticipation of this outcome.  However, I think Discovery's current price represents a good entry point and the downside risk to the stock is now low compared with its upside potential over the next year.  Twenty-three analysts that follow Discovery agree since their current average target price is $38.22 (+48.1% above today's purchase price).  In addition, its current valuation is attractive given its forward fiscal year P/E ratio is only 9.2.  

As detailed below, a potential return-on-investment result for this Discovery Inc. position is +2.2% absolute return (equivalent to +53.0% annualized return over the next 15 days) if the stock is in-the-money and therefore assigned on the November 19th, 2021 options expiration date.

 

Discovery Inc. (DISCA) -- New Covered Calls Position

The buy/write transaction was as follows:
11/05/2021 Bought 500 shares of Discovery Inc. stock @ $25.80 per share 
11/05/2021 Sold 5 Discovery November 19th, 2021 $25.00 Call options @ $1.34 per share
Note: The Implied Volatility of the Call option was 41.2 when this transaction was executed which provides an excellent return-on-investment potential (as detailed below). 

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $12,233.35
= ($25.80 - $1.34) * 500 shares + $3.35 commission

Net Profit Components:
(a) Option Income: +$666.65
= ($1.34 * 500 shares) - $3.35 commission
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If DISCA stock is above $25.00 strike price at Nov. 19th, 2021 expiration): -$400.00
= ($25.00 -$25.80) * 500 shares

Total Net Profit: +$266.65
= (+$666.65 Call options income +$0.00 dividend income -$400.00 capital appreciation)

Absolute Return-on-Investment: +2.2%
= +$266.65/$12,233.35
Equivalent Annualized Return-on-Investment: +53.0%
= (+$266.65/$12,233.35)*(365/15 days)