Today, I decided to close out my Caterpillar Inc. 10/28/2022 $170.00 Covered Call position early. Today was the $1.20 per share ex-dividend date, so by waiting until today I was able to capture the dividend. But I decided not to retain this Covered Calls position until next Friday's (October 28th) options expiration since CAT's quarterly earnings report is before market open on the October 28th options expiration date. Because of the usual stock price volatility immediately after quarterly earnings releases, I prefer not holding positions then. Caterpillar's bullish price move this morning provided an opportunity to lock in a very attractive return-on-investment for this investment.
As detailed below, the return-on-investment result for this Caterpillar Covered Call position was +1.7% absolute return-on-investment in 7 days (equivalent to a +88.4% annualized
return-on-investment). This +88.4% annualized return-on-investment (aroi) achieved is greater than the maximum +57.2% aroi that might have been achieved if the stock would instead remain in-the-money and therefore assigned on its original expiration date next Friday.
Caterpillar Inc. (CAT) -- Covered Call Position Closed Out
The simultaneous buy/write transaction was as follows:
10/14/2022 Bought 100 shares of Caterpillar stock @ $178.61 per share
10/14/2022 Sold 1 Caterpillar October 28th, 2022 $170.00 Call option @ $11.35 per share. Note: the Implied Volatility of this Call option was 43.8 when this buy/write transaction was executed.
10/21/2022 $1.20 per share ex-dividend captured
10/21/2022 Closed out (i.e. unwound) this Caterpillar Covered Call position by Selling-to-Close 100 CAT shares at $184.50 and simultaneously Buying-to-Close 1 10/28/2022 $170.00 Call at $15.59 per share.
The overall performance result (including commissions) was as follows:
Covered Call Net Investment: $16,726.67
= ($178.61 - $11.35)* 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: -$425.34
= ($11.35 - $15.59) * 100 shares - $1.34 commissions
(b) Dividend Income: +$120.00 = $1.20 per share x 100 shares
(c) Capital Appreciation (100 CAT shares sold at $184.50 each): +$589.00
= ($184.50 -$178.61) * 100 shares
Total Net Profit: +$283.66
= (-$425.34 option income +$120.00 dividend income +$589.00 capital appreciation)
Absolute Return-on-Investment: +1.7%
= +$283.66/$16,726.67
Equivalent Annualized Return-on-Investment: +88.4%
= (+$283.66/$16,726.67) * (365/7 days)
