Today a Covered Calls position was established in JPMorgan Chase & Co. (ticker symbol JPM) when the Covered Calls Advisor's buy/write net debit limit order at $98.78 was executed. Two hundred JPM shares were purchased at $108.93 and two October 21st, 2022 $100.00 Call options were sold at $10.15 per share. The time value in the Call options when this position was established was $1.22 per share = [$10.15 Call options premium received - ($108.93 stock purchase price - $100.00 strike price)] and the Implied Volatility of these Calls when this position was established was 38.3.
I am being very conservative in establishing in-the-money strike prices in this bear market. For example, this JPMorgan Covered Calls position is a deep-in-the-money position since the stock purchase price is 8.9% above
the $100.00 strike price. The Delta of the Calls was 79.3 which provides a good approximation of 79.3% for the probability of assignment on the options expiration date.
JPMorgan's upcoming dividend is $1.00 per share (a 3.7% annualized dividend yield based on today's stock purchase price) and it goes ex-dividend on October 5th, 2022 which is prior to the October 21st options expiration date--so this dividend is included in the potential return-on-investment results detailed below. I prefer not holding positions on the day when any company is reporting their quarterly earnings. So, it is likely I will decide to unwind (i.e. close out) this position prior to JPMorgan's next quarterly earnings report on October 14th.
This position is very similar to a JPMorgan position established just prior to their last quarterly ex-dividend date. Like JPMorgan, most companies in the Financial Sector 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 JPMorgan Covered Calls position continues the Dividend Capture Strategy of often selling
in-the-money monthly Covered Calls for one of six very large 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, 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 would also exceed the Covered Calls Advisor's minimum threshold. 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.
As detailed below, two potential return-on-investment results are:
- +1.2% absolute return (equivalent to +37.4% annualized return for the next 12 days) if the stock is assigned early (business day prior to the October 5th, 2022 ex-dividend date); OR
- +2.2% absolute return (equivalent to +28.2% annualized return over the next 29 days) if the stock is assigned on the October 21st, 2022 options expiration date.
JPMorgan Chase & Co. (JPM) -- New Covered Calls Position
9/23/2022 Bought 200 JPM shares @ $108.93
9/23/2022 Sold 2 JPM October 21st, 2022 $100.00 Call options @ $10.15 per share
10/05/2022 Upcoming quarterly ex-dividend at $1.00 per share
Two possible overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Net Investment: $19,757.34
= ($108.93 - $10.15) *200 shares + $1.34 commission
Net Profit:
(a) Options Income: +$2,028.66
= ($10.15 *200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on October 4th, the business day prior to the October 5th ex-div date): +$0.00; or
(b) Dividend Income (If JPM assigned at the Oct. 21st, 2022 options expiration date): +$200.00
= ($1.00 dividend per share x 200 shares)
+($100.00 -$108.93) * 200 shares; or
(c) Capital Appreciation (If JPM assigned at $100.00 strike price at expiration): -$1,786.00
+($100.00-$108.93) * 200 shares
1. Total Net Profit [If option exercised on the last business day prior to the Oct. 5th ex-dividend date)]: +$242.66
These return results would be achieved as long as the stock is
above the $100.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $97.78 ($108.93 -$10.15 -$1.00)
provides 10.2% downside protection below today's $108.93 purchase
price. As detailed in the Dividend Capture spreadsheet below, early assignment
would still be a desirable outcome since its +37.4% annualized
return-on-investment (aroi) exceeds both: (1) the Covered Calls Advisor's +25.0%
minimum aroi threshold for an early assignment; and (2) the +28.2% aroi if the position is in-the-money and therefore assigned on the October 21st options expiration date.
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. Eight of the nine criteria are achieved in this JPMorgan position.
