This afternoon shortly after 3:00pm, a Covered Calls position was established in Wells Fargo (ticker symbol WFC) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $43.86 and 3 May 13th, 2022 Call options were sold at $4.12 at the $40.00 strike price. The corresponding extrinsic value (i.e. time value) was $.26 per share
[$4.12 Call options premium - ($43.86 stock purchase price - $40.00
strike price)], all of which will be profit if the stock is assigned (either by early assignment on the day prior to the ex-dividend date of at the May 13th options expiration date).
At today's purchase price, the upcoming ex-dividend of $.25 on May 5th has a 2.3% annualized dividend yield. So, this short-term (only 15 days until options expiration) position is established to take advantage of the potential to achieve a high annualized return-on-investment in a position that meets all nine criteria of the Covered Calls Advisor's Dividend Capture Strategy (see table at end of this post). In addition, Wells Fargo fundamentally is historically undervalued since it now trades at a price-to-tangible-book-value ratio of 1.10, a level below its prior 5-year average of 1.31. Also, the investment firm analysts covering Wells Fargo have a current average price target of $60.30 (+37.5% above today's purchase price).
The Implied Volatility of the Call options was 43.5 which, as desired by the Covered Calls Advisor, is well above the current 33.0 of the S&P 500 Volatility Index (i.e. VIX). Two potential return-on-investment results for this position are
highlighted below (including the possibility of early assignment since
the ex-dividend is prior to the May 13th options expiration date).
Given the Covered Calls Advisor's current cautious overall market
sentiment, a deep in-the-money Covered Calls position was established--the Delta was 86.4 which approximates the probability that the stock will be in-the-money, and therefore assigned (i.e. sold), on the May 13th options expiration date.
As detailed below, two potential return-on-investment results are:
- +0.6% absolute return (equivalent to +38.8% annualized return for the next 6 days) if the stock is assigned early (business day prior to the May 5th ex-dividend date); OR
- +1.3% absolute return (equivalent to +30.8% annualized return over the next 15 days) if the stock is assigned on the May 13th options expiration date.
Wells Fargo & Company (WFC) -- New Covered Calls Position
The buy/write transaction was:
Note: this stock price was down 2.9% from yesterday's closing price (and the Dow was down more than 700 points) this afternoon when this transaction executed.
04/29/2022 Sold 3 Wells Fargo 5/13/2022 $40.00 Call options @ $4.12
05/05/2022 Upcoming quarterly ex-dividend of $.25 per share
Two possible overall performance results (including commissions) for this Wells Fargo Covered Calls position are as follows:
Covered Calls Cost Basis: $11,924.01
= ($43.86 - $4.12) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$1,233.99
= ($4.12 * 300 shares) - $2.01 commission
(b) Dividend Income (If option exercised early on May 4th, the business day prior to the May 5th ex-div date): +$0.00; or
(b) Dividend Income (If Wells Fargo stock assigned at May 13th, 2022 options expiration; so the $.25 dividend is captured): +$75.00
= ($.25 dividend per share x 300 shares)
+($40.00 - $43.86) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $40.00 strike price at options expiration): -$1,158.00
+($40.00 - $43.86) * 300 shares
Either outcome provides an attractive return-on-investment result for this Wells Fargo investment. These returns will be achieved as long as the stock is above the $40.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $39.49 ($43.86 -$4.12 -$.25) provides a substantial 10.0% 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 Wells Fargo position, all nine criteria are met.
