Today, a new Covered Calls position was established in Devon Energy Corp. when 300 shares were purchased at $76.20 and 3 June 17th, 2022 Call options were sold at $5.36 per share at the $72.00 strike price. The net debit limit order at $70.84 was executed, so the time value was $1.16 per share [$5.36 Call options premium - ($76.20 stock purchase price - $72.00 strike price)]. There is a very generous upcoming ex-dividend of $1.27 per share (6.7% annualized yield) on June 10th, 2022. Two potential return-on-investment results for this position are detailed below and includes the possibility of early exercise since this ex-dividend is prior to the options expiration date.
Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, an in-the-money Covered Calls position was established -- the Delta was 71.9, which approximates a probability of 71.9% that the Call options will be in-the-money on the options expiration date. The Covered Calls Advisor Portfolio did not have a company in the Energy Sector and Devon appeared in my Energy Sector stock screener and it also provides a very substantial upcoming ex-dividend prior to the June 17th options expiration date--which presented a good opportunity to deploy my Dividend Capture Strategy.
In addition, and as is the case now with many companies in the Energy Sector, the Implied Volatility of the Devon Calls was high at 44.9 when this transaction was executed, and as desired by the Covered Calls Advisor, substantially higher than the current 25.8 of the S&P 500 Volatility Index (i.e. VIX). This elevated Implied Volatility provides attractive annualized-return-on-investment potential (as demonstrated in the detailed potential return-on-investment results shown below). Also as desired, the next quarterly earnings report on August 2nd is after the June 17th options expiration date, thereby avoiding the normal even more volatile price swings caused by the uncertainty surrounding companies' earnings reports.
As detailed below, a potential return-on-investment result is +1.6% absolute return (equivalent to +66.0% annualized return for the next 9 days) if the stock is assigned early (business day prior to the June 10th ex-date); OR +3.4% absolute return (equivalent to +73.4% annualized return over the next 17 days) if the stock is assigned on the June 17th, 2022 options expiration date.
The net debit limit order buy/write transaction today was as follows:
6/01/2022 Bought 300 Devon Energy shares @ $76.20
6/01/2022 Sold 3 Devon 6/17/2022 $72.00 Call options @ $5.36 Note: the Implied Volatility of these Call options was 44.9 when this position was established and their Bid/Ask spread was $5.20/$5.55.
6/10/2022 Upcoming quarterly ex-dividends of $1.27 per share
Two possible overall performance results (including commissions) for this Devon Energy Covered Calls position are as follows:
Covered Calls Cost Basis: $21,254.01
= ($76.20 - $5.36) * 300 shares + $2.01 commissions
Net Profit Components:
(a) Options Income: +$1,605.99
= ($5.36 * 300 shares) - $2.01 commissions
(b) Dividend Income (If option exercised early on the business day prior to the June 10th ex-div date): +$0.00; or
(b) Dividend Income (If Devon shares assigned at the June 17th, 2022 options expiration): +$381.00
= ($1.27 dividend per share x 300 shares)
(c) Capital Appreciation (If Devon shares assigned early on June 9th): -$1,260.00
+($72.00 - $76.20) * 300 shares ;or
(c) Capital Appreciation (If Devon shares assigned at $72.00 strike price at the 6/17/2022 options expiration): -$1,260.00
+($72.00 - $76.20) * 300 shares
These very attractive returns will be achieved as long as the stock is above the $72.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $69.57 ($76.20 -$5.36 -$1.27) provides 8.7% 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 met for this Devon Energy Corp. Covered Calls position.
