I was seeking to identify a Covered Calls position in the Financial Sector that could take advantage of the Dividend Capture Strategy criteria (see nine criteria at the bottom of this post). Discover meets these criteria at the current time. Discover exceeded analysts' estimates in their recently reported quarterly earnings and their strong consumer credit loss performance. They continue to demonstrate a triple benefit from growth, credit performance, and profitability. They are a significant beneficiary of higher interest rates from an increasing net interest income in their growing credit card receivables base. Moreover, their return-on-equity (which exceeds their cost of capital) is among the highest in the consumer finance industry and their trailing-twelve-months (ttm) P/E Ratio is attractively valued at 7.0. Finally, there are currently 20 Wall Street analysts covering Discover and their average target price target is $122.67 (+13.5% above today's purchase price of $108.10).
Two potential return-on-investment results are as follows: (a) +0.9% absolute return-on-investment (equivalent to +45.5% annualized roi) for 7 days if this Covered Calls position is assigned early on August 23rd, 2022 (the last business day prior to the Aug. 24th ex-dividend date); OR (b) +1.5% absolute return-on-investment (equivalent to +31.5% annualized roi) for 17 days if this Covered Calls position is in-the-money on the September 2nd, 2022 options expiration date.
Discover Financial Services (DFS) -- New Covered Calls Position Established
The buy/write transaction was as follows:
8/17/2022 Bought 200 shares of Discover Financial Services @ $108.10 per share
8/17/2022 Sold 2 DFS Sept. 2nd, 2022 $102.00 Call options @ $6.99 per share
8/24/2022 Ex-dividend of $.60 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $20,223.34
= ($108.10 - $6.99) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,396.66
= ($6.99 * 200 shares) - $1.34 commission
(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 the Sept. 2nd, 2022 expiration): +$120.00
= ($.60 dividend per share x 200 shares)
(c) Capital Appreciation (If Discover shares assigned early): -$1,220.00
+($102.00 strike price - $108.10 stock purchase cost) * 200 shares; or
(c) Capital Appreciation (If DFS shares assigned at $102.00 strike price at options expiration): -$1,220.00
+($102.00 - $108.10) * 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 $102.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $100.51 ($108.10 -$6.99 -$.60) provides 7.0% 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.
