Covered Call Established in Pioneer Natural Resources Company

A Covered Call position was established in the Pioneer Natural Resources Co. (ticker PXD), with a June 17th, 2021 options expiration date. One hundred shares of Pioneer were purchased at $250.88 and one Call option was sold at $25.28 per share at the $230.00 strike price. The time value was $4.40 per share [$230.00 strike price - ($250.88 share price - $25.28 Call option premium)] when this buy/write limit order transaction was executed.  This limit order was placed late this morning and didn't execute until 2:20pm ET this afternoon.  I normally place same day buy/write orders at limit prices below the current market.  Sometimes they get executed and sometimes not, but the stock declined substantially from its peak price today and was executed at the prices shown above.  The Delta for this Call option was 76.4 when this position was established which approximates the probability that the position will close in-the-money (and therefore be assigned) on the June 17th, 2022 options expiration date.  

Pioneer has taken the extraordinary step this quarter of paying out 80% of its $2.0 billion free cash flow to investors in an amazing $7.38 dividend with an ex-div date of May 27th, 2022.  See CEO Scott Sheffield on Jim Cramer's Mad Money discussing it here.  This represents an 11.8% annualized dividend yield at today's $250.88 stock purchase price.  This income is included in the potential return-on-investment results detailed below.  Their quarterly earnings were just reported about 4 weeks ago, so there is no quarterly earnings report prior to the June 17th, 2022 options expiration date.

Pioneer Natural Resources Company is a leading pure-play oil and gas exploration and production (E&P) company that explores for, develops, and produces oil, natural gas, natural gas liquids (NGLs) and gas within the U.S., with operations primarily in the Permian Basin in West Texas.  Pioneer is known for its low breakeven costs and its strong balance sheet.  The recent acquisition of Parsley Energy provides additional assets and further diversifies its operations into the Delaware Basin (in West Texas and Southeastern New Mexico), one of the most prolific basins in the U.S. 

There are currently 33 analysts covering Pioneer and their average price target is $293.65 (+17.0% above today's purchase price of $250.88).

Two potential return-on-investment results are as follows: (a) +2.0% absolute return-on-investment (equivalent to +44.5% annualized roi) for 16 days if this Covered Call position is assigned early on May 26th (the last business day prior to the May 27th ex-dividend date); OR  (b) +5.2% absolute return-on-investment (equivalent to +50.2% annualized roi) for 38 days if this Covered Call position is in-the-money on the June 17th, 2022 options expiration date.

Pioneer Natural Resources Company (PXD) -- New Covered Call Position Established
The buy/write transaction was as follows:
5/11/2022 Bought 100 shares of Pioneer Natural Resources @ $250.88 per share 
5/11/2022 Sold 1 PXD June 17th, 2022 $230.00 Call option @ $25.28 per share.  Note: the Implied Volatility of the Call option was 29.4 when this transaction was executed.
5/27/2021 Ex-dividend of $7.38 per share
 
Two possible overall performance results (including commissions) would be as follows:
Covered Call Cost Basis: $22,560.67
= ($250.88 - $25.28) * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$2,528.00
= ($25.28 * 100 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 PXD shares assigned at June 17th, 2022 expiration): +$738.00
= ($7.38 dividend per share x 100 shares)
(c) Capital Appreciation (If Pioneer shares assigned early): -$2,088.00
+($230.00 strike price - $250.88 stock purchase cost) * 100 shares; or
(c) Capital Appreciation (If PXD shares assigned at $230.00 strike price at options expiration): -$2,088.00
+($230.00 - $250.88) * 100 shares

1. Total Net Profit [If option exercised on May 26th, 2022 (the last business day prior to the May 27th ex-dividend date)]: +$440.00

= (+$2,528.00 option income +$0.00 dividend income -$2,088.00 capital appreciation); or

2. Total Net Profit (If Pioneer Natural Resources shares assigned at $230.00 at June 17th, 2022 options expiration): +$1,178.00

= (+$2,528.00 +$738.00 -$2,088.00)

1. Absolute Return-on-Investment (If PXD options exercised early on the last business day prior to the ex-dividend date): +2.0%

= +$440.00/$22,560.67

Annualized Return-on-Investment (If PXD Call option exercised early on May 26th): +44.5%

= (+$440.00/$22,560.67) * (365/16 days); or

2. Absolute Return-on-Investment (If PXD shares assigned at $230.00 at June 17th, 2022 options expiration date): +5.2%

= +$1,178.00/$22,560.67

Annualized Return-on-Investment (If Pioneer Natural Resources stock assigned at $230.00 at June 17th, 2022 options expiration date): +50.2%

= (+$1,178.00/$22,560.67) * (365/38 days)

Either outcome would provide a very good return-on-investment result.  These returns will be achieved as long as the stock is above the $230.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $218.22 ($250.88 -$25.28 -$7.38) provides 13.0% downside protection below today's purchase price.