At today's purchase price, the upcoming ex-dividend of $.30 (note: a 20% increase above the prior regular quarterly dividend) on August 4th has a 2.8% annualized dividend yield. So, this short-term (only 12 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 1.09, 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 $53.08 (+21.9% above today's purchase price).
The Implied Volatility of the Call options was 26.8 which, as desired by the Covered Calls Advisor, is above the current 22.5 of the S&P 500 Volatility Index (i.e. VIX).
This position is similar to a Wells Fargo Covered Calls position established last quarter just prior to their ex-dividend date. Most companies in the Financial Sector (such as Wells Fargo) provide only modest growth prospects, but they often provide good annual dividend yields. Consequently, the Covered Calls Advisor targets opportunities to use the Dividend Capture Strategy in all Financial Sector Covered Calls positions. This new Wells Fargo Covered Calls position continues the Covered Calls Advisor's Dividend Capture Strategy of often selling
in-the-money monthly Covered Calls for one of six mega-cap U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo) for each options expiration
month:
(JPMorgan Chase quarterly for Jan, Apr, July, and Oct options expirations;
Citigroup, Morgan Stanley, and/or Wells Fargo for Feb, May, Aug, and Nov options expirations; and
Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec options expirations).
The goal of these monthly Covered Calls in these banks is to both provide an opportunity to either: (1) potentially capture the quarterly dividend payment and if the stock price remains above the strike price at
options expiration, in which case the maximum possible return-on-investment result on the options expiration date for the position would be achieved; or (2) have the stock assigned early on the day prior to the ex-dividend date in which case the Covered Calls Advisor is usually very pleased since the Dividend Capture Strategy criteria are designed such that the annualized return-on-investment for early assignment normally exceeds the Covered Calls Advisor's minimum threshold (as is the case with this Wells Fargo position). So far, applying this approach has provided attractive annualized return results -- better than would be achieved
if Covered Calls positions for these bank stocks were held in the Covered Calls Advisor Portfolio during the other two non-dividend paying months each quarter.
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 August 12th options expiration date).
Given the Covered Calls Advisor's current cautious overall market
sentiment, a moderately in-the-money Covered Calls position was established--the Delta was 77.3 which approximates a probability of 77.3% that the stock will be in-the-money, and therefore assigned (i.e. sold), on the August 12th options expiration date.
As detailed below, two potential return-on-investment results are:
- +0.6% absolute return (equivalent to +73.8% annualized return for the next 3 days) in the relatively unlikely event that the stock is assigned early (business day prior to the August 4th ex-dividend date); OR
- +1.3% absolute return (equivalent to +40.3% annualized return over the next 12 days) if the stock is assigned on the August 12th options expiration date.
Wells Fargo & Company (WFC) -- New Covered Calls Position
The buy/write transaction was:
8/01/2022 Sold 5 Wells Fargo 8/12/2022 $42.00 Call options @ $1.80
8/04/2022 Upcoming quarterly ex-dividend of $.30 per share
Two possible overall performance results (including commissions) for this Wells Fargo Covered Calls position are as follows:
Covered Calls Cost Basis: $20,873.35
= ($43.54 - $1.80) * 500 shares + $3.35 commission
Net Profit Components:
(a) Options Income: +$896.65
= ($1.80 * 500 shares) - $3.35 commission
(b) Dividend Income (If option exercised early on August 3rd, the day prior to the Aug 4th ex-div date): +$0.00; or
(b) Dividend Income (If Wells Fargo stock assigned at the August 12th, 2022 options expiration; so the $.30 dividend is captured): +$150.00
= ($.30 dividend per share x 500 shares)
+($42.00 - $43.54) * 500 shares; or
(c) Capital Appreciation (If shares assigned at $42.00 strike price at options expiration): -$770.00
+($42.00 - $43.54) * 500 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 $42.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $41.44 ($43.54 -$1.80 -$.30) provides a 4.8% 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.
