You might recall that a prior Financial sector Covered Calls position in Capital One Financial was closed out by early assignment last Friday (see details here) and the Covered Calls Advisor indicated that the cash from that position would likely be used to establish another Covered Calls position in the Financial sector to replace it -- Discover Financial is that position. Capital One and Discover are similar in two respects (1) both are primarily in the Consumer Finance industry; and (2) both reported estimate-beating results in their recent quarterly earnings reports and they both also have good valuations at less than a 10 P/E based on 2021's expected annual earnings per share. Finally, there are currently 21 analysts covering Discover and their average target price target is $141.21 (+19.6% above today's purchase price of $118.03).
Two potential return-on-investment results are as follows: (a) +1.2% absolute return-on-investment (equivalent to +54.3% annualized roi) for 8 days if this Covered Calls position is assigned early on November 22nd (the last business day prior to the Nov. 23rd ex-dividend date); OR (b) +1.6% absolute return-on-investment (equivalent to +31.4% annualized roi) for 19 days if this Covered Call position is in-the-money on the December 3rd, 2021 options expiration date.
Discover Financial Services (DFS) -- New Covered Calls Position Established
The buy/write transaction was as follows:
11/15/2021 Bought 200 shares of Discover Financial Services @ $118.03 per share
11/15/2021 Sold 2 DFS Dec. 3rd, 2021 $114.00 Call options @ $5.37 per share
11/23/2021 Ex-dividend of $.50 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $22,533.34
= ($118.03 - $5.37) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,074.00
= ($5.37 * 200 shares)
(b) Dividend Income (If option exercised early on the last business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If DFS shares assigned at Dec. 3rd, 2021 expiration): +$100.00
= ($.50 dividend per share x 200 shares)
(c) Capital Appreciation (If Discover shares assigned early): -$806.00
+($114.00 strike price - $118.03 stock purchase cost) * 200 shares; or
(c) Capital Appreciation (If DFS shares assigned at $114.00 strike price at options expiration): -$806.00
+($114.80- $118.03) * 200 shares
Either outcome would provide a very good return-on-investment result. These returns will be achieved as long as the stock is above the $114.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $112.26 ($118.03 -$5.37 -$.50) provides 4.9% 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, all nine criteria are achieved for this Discover Financial Services Covered Calls position.
