This morning, two in-the-money Covered Calls positions were established in Cisco Systems Inc. (ticker symbol CSCO) and Suncor Energy Inc. (SU) when the Covered Calls Advisor's buy/write limit orders were executed. For Cisco Systems, 400 shares were purchased at $44.47 and 4 December 2nd, 2022 Call options were sold at $3.95 per share at the $41.00 strike price. For Suncor Energy, 400 shares were purchased at $36.38 and 4 December 16th, 2022 Call options were sold at $3.12 at the $34.00 strike price. Given the Covered Calls Advisor's current cautious outlook, moderately in-the-money Covered Calls positions were established for both companies.
Cisco's quarterly earnings report was issued after the market close today. Normally, I avoid being invested during earnings reports, but when it was announced that Cisco CEO Chuck Robbins would be interviewed by Jim Cramer today on his Mad Money show, I decided to take advantage of the elevated Implied Volatility of 43.5. I have noticed that CEO's who agree to be interviewed by Cramer on the same day as their earnings typically do so only when they are going to be discussing a positive earnings report. Fortunately, that turned out to be true once again in this Cisco situation. Because of the increased uncertainty of the potential stock reaction to today's earnings report, a deeper-than-normal Delta of 79.9 was chosen for this Covered Calls position.
The second position is in Suncor Energy Inc. Suncor is a $50 billion market cap Canada-based integrated energy company. I established a December 16th, 2022 at the $34.00 strike price Covered Calls net debit limit order. This limit order was executed a couple hours later (while I was exercising at the gym), so I don't know what the Implied Volatility or the Delta were at the moment when this order was executed. But the 400 SU shares were purchased at $36.38 per share and the four Dec. 16th, 2022 $34.00 Calls were sold at $3.12 per share, so the time value was $.74 per share = [$34.00 strike price - ($36.38 stock purchase price - $3.12 Call options price)].
Suncor appeared in my Energy Sector stock screener which identified on the top 7% of Energy companies. Their valuation is very attractive based on their trailing twelve months (through Q3 2022) P/E Ratio of 6.3 and this is expected to decline further to 5.3 when they announce their Q4 results on February 1st, 2023. Before market open this morning, Suncor announced their next quarterly dividend of $.39 per share (4.3% annual dividend yield) which goes ex-dividend on December 1st, 2022. Since this is prior to the Dec.16th options expiration date, the potential for capturing this dividend is included in the potential return-on-investment results below.
As detailed below, the potential return-on-investment results for each of these Covered Calls positions are:
- For Cisco Systems Inc.: +1.2% absolute return (equivalent to +25.4% annualized return-on-investment for the next 17 days) if the stock is assigned on the December 2nd, 2022 options expiration date.
- For Suncor Energy Inc.: +2.2% absolute return (equivalent to +53.6% annualized return-on-investment for the next 15 days) if the stock is assigned early (last trading day prior to the December 1st ex-dividend date); OR (2) +3.4% absolute return (equivalent to +39.8% annualized return over the next 31 days) if the stock is assigned on the Dec. 16th options expiration date.
1. Cisco Systems Inc. (CSCO) -- New Covered Calls Position
11/16/2022 Bought 400 Cisco shares @ $44.47
11/16/2022 Sold 4 Cisco 12/2/2022 $41.00 Call options @ $3.95 per share
Note: the Time Value (aka Extrinsic Value) in the Call options was $.48 per share = [$3.95 Call options premium - ($44.47 stock price - $41.00 strike price)]
A possible overall performance result (including commissions) for this Cisco Covered Calls position is as follows:
Covered Calls Net Investment: $16,210.68
= ($44.47 - $3.95) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,580.00
= ($3.95 * 400 shares)
(b) Dividend Income (If Cisco stock assigned at the Dec. 2nd, 2022 options expiration): +$0.00
+($41.00 - $44.47) * 400 shares
2. Suncor Energy Inc. (SU) -- New Covered Calls Position
The buy/write transaction was:11/16/2022 Bought 400 Suncor Energy shares @ $36.38 each
11/16/2022 Sold 4 SU 12/16/2022 $34.00 Call options @ $3.12 per share
12/1/2022 Upcoming quarterly ex-dividend of $.39 per share
Two possible overall performance results (including commissions) for this Suncor Covered Calls position are as follows:
Covered Calls Net Investment: $13,306.68
= ($36.38 - $3.12) * 400 shares + $2.68 commission
Net Profit:
(a) Options Income: +$1,245.32
= ($3.12 * 400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on November 30th, 2022 the business day prior to the Dec. 1st ex-div date): +$0.00; or
(b) Dividend Income (If Suncor Energy shares assigned at December 16th, 2022 expiration): +$156.00
= ($.39 dividend per share x 400 shares)
+($34.00 -$36.38) * 400 shares; or
(c) Capital Appreciation (If Suncor Energy shares assigned at $34.00 strike price at expiration): -$952.00
+($34.00 - $36.38) * 400 shares
1. Total Net Profit [If option exercised on November 30th (business day prior to the Dec. 1st, 2022 ex-dividend date)]: +$293.32
Either outcome provides a very good return-on-investment result for this investment. These returns will be achieved as long as the stock is above the $34.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $32.87 ($36.38 -$3.12 -$.39) provides 9.6% downside protection below today's purchase price.
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. As shown below, in this case all nine criteria are achieved for this Suncor Energy Inc. Covered Calls position.
