Established Covered Calls Position in Valero Energy Corporation

An August 19th, 2022 Covered Calls buy/write limit order was placed in Valero Energy Corporation (ticker VLO) at a net debit limit price of $98.70 per share.  The order was executed at 2:57pm ET when 200 shares were purchased at $107.85 and two 8/19/2022 Call options were simultaneously sold at the $100.00 strike price for $9.15 per share.  The Implied Volatility of these Call options was 40.8 when this transaction was executed which, as preferred by the Covered Calls Advisor, is well above the current 22.5 of the S&P 500 Volatility Index (VIX).  In addition, there is an upcoming quarterly ex-dividend of $.98 per share (3.6% annual dividend yield) on August 3rd, which is included in the potential return-on-investment calculations detailed below.  When this in-the-money Covered Calls position was established today it had a probability of assignment on the options expiration date of 77.8%. 

Valero is a large, high quality oil refiner with 15 refineries located primarily in the U.S. but also in Canada and the United Kingdom.  All refiners are benefiting now from tight refining capacity relative to demand, a situation unlikely to change significantly in the near-term future.  Valero expects to continue its operational excellence in the current quarter (Q3 2022) at a 90%+ refinery utilization rate.  Management is shareholder friendly since they intend to continue share buybacks, debt reduction, and given their declining dividend payout ratio, they will most likely increase their quarterly dividend payout in the future.    

Valero meets the five primary criteria currently preferred for new positions established by the Covered Calls Advisor:

As detailed below, two potential return-on-investment results are: 

•  +1.3% absolute return (equivalent to +79.7% annualized return for the next 6 days) if the stock is assigned early (business day prior to the August 3rd, 2022 ex-dividend date); OR 

• +2.3% absolute return (equivalent to +36.5% annualized return over the next 23 days) if the stock is assigned on the August 19th, 2022 options expiration date.

These returns will be achieved as long as Valero's stock price is above the $100.00 strike price at options expiration.  If the stock declines below the strike price, the breakeven price of $97.72 per share ($107.85 stock purchase price - $9.15 Call options selling price - $.98 ex-dividend amount) provides a substantial 9.4% downside breakeven protection below today's stock purchase price.
 

Valero Energy Corporation (VLO) -- New Covered Calls Position

If the stock price increases to the point where the current time value (i.e. extrinsic value) of $1.30 remaining in the short Call options decays substantially (down to about $.15 or less) by August 2nd, 2022 (the last business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 200 Valero shares away to capture the August 3rd dividend payment.  As detailed in the Dividend Capture spreadsheet below, early assignment would be a very desirable outcome since its +79.7% annualized return-on-investment (aroi) exceeds the +36.5% aroi that would be achieved if the assignment was instead on the August 19th options expiration date.

The simultaneous buy/write transaction was:
7/28/2022 Bought 200 Valero shares @ $107.85
7/28/2022 Sold 2 Valero August 19th, 2022 $100.00 Call options @ $9.15 per share
8/03/2022 Upcoming quarterly ex-dividend at $.98 per share

Two possible overall performance results (including commissions) for this Valero Energy Covered Calls position are as follows:
Net Investment: $19,741.34
= ($107.85 - $9.15) *200 shares + $1.34 commission

Net Profit:
(a) Options Income: +$1,828.66
= ($9.15 *200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on Aug 2nd, the business day prior to the August 3rd ex-div date): +$0.00; or
(b) Dividend Income (If Valero's shares assigned at the August 19th, 2022 expiration): +$196.00
= ($.98 dividend per share x 200 shares)

(c) Capital Appreciation (If Valero's stock assigned early): -$1,570.00
+($100.00 -$107.85) * 200 shares; or
(c) Capital Appreciation (If Valero shares assigned at $100.00 strike price at options expiration): -$1,570.00
+($100.00-$107.85) * 200 shares

1. Total Net Profit [If option exercised on the last business day prior to the August 3rd ex-dividend date)]: +$258.66

= (+$1,828.66 options income +$0.00 dividend income -$1,570.00 capital appreciation); or

2. Total Net Profit (If Valero stock assigned at $100.00 at the August 19th, 2022 expiration): +$454.66

= (+$1,828.66 options income +$196.00 dividend income -$1,570.00 capital appreciation)

1. Absolute Return-on-Investment (If option exercised on business day prior to ex-dividend date): +1.3%

= +$258.66/$19,741.34

Annualized Return-on-Investment (If option exercised early): +79.7%

= (+$258.66/$19,741.34) * (365/6 days); or

2. Absolute Return-on-Investment (If Valero stock assigned at $100.00 at August 19th expiration date): +2.3%

= +$454.66/$19,741.34

Annualized Return-on-Investment (If Valero shares assigned at $100.00 at 8/19/2022 options expiration date): +36.5%

= (+$454.66/$19,741.34)*(365/23 days)

At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy.  As shown below, all nine criteria are achieved in this Valero Energy Corp. position.