Early this afternoon a Covered Calls position was established in Discover Financial Services (ticker DFS) with a December 2nd, 2022 options expiration date. Two hundred shares of Discover were purchased at $104.18 and two Call options were sold at $4.80 per share at the $101.00 strike price. This position is very similar to a Covered Calls position established in Discover last quarter (see here ). The time value was $1.62 per share [$101.00 strike price - ($104.18 share price - $4.80 Call options premium)] when this buy/write limit order transaction was executed.
Discover also has an upcoming ex-dividend date exactly one week from today at $.60 per share, so this is included in the potential return-on-investment results detailed below. This Covered Calls position is consistent with my preference to establish Covered Calls in low-growth sectors (such as this one in the Financials sector) using my Dividend Capture Strategy. With this strategy it is possible to achieve an attractive annualized return-on-investment result if either the position is assigned on the options expiration date or if it is assigned early (normally on the day prior to the ex-dividend date). Also, because of the volatility immediately after quarterly earnings reports are released, it is preferred that there be no quarterly earnings report prior to the options expiration date, and this is true for this Discover Financial position since the next earnings report is not until January 18th, 2023. The probability of assignment was 66.2% when this position was established.
Two potential return-on-investment results are as follows: (a) +1.6% absolute return-on-investment (equivalent to +84.6% annualized roi) for 7 days if this Covered Calls position is assigned early on November 21st, 2022 (the last business day prior to the Nov. 22nd ex-dividend date); OR (b) +2.2% absolute return-on-investment (equivalent to +45.2% annualized roi) for 18 days if this Covered Calls position is in-the-money on the December 2nd, 2022 options expiration date.
Discover Financial Services (DFS) -- New Covered Calls Position Established
The buy/write transaction was as follows:
11/15/2022 Bought 200 shares of Discover Financial Services @ $104.18 per share
11/15/2022 Sold 2 DFS Dec. 2nd, 2022 $101.00 Call options @ $4.80 per share. The Implied Volatility of these Calls was 30.3 when this position was established.
11/22/2022 Ex-dividend of $.60 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $19,877.34
= ($104.18 - $4.80) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$958.66
= ($4.80 * 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 Dec. 2nd, 2022 expiration): +$120.00
= ($.60 dividend per share x 200 shares)
(c) Capital Appreciation (If Discover shares assigned early): -$636.00
+($101.00 strike price - $104.18 stock purchase cost) * 200 shares; or
(c) Capital Appreciation (If DFS shares assigned at $101.00 strike price at options expiration): -$636.00
+($101.00 - $104.18) * 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 $101.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $98.78 ($104.18 -$4.80 -$.60) provides 5.2% 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, eight of the nine criteria are achieved for this Discover Financial Services Covered Calls position.
