This afternoon I established a buy/write net debit limit order for a January 20th, 2023 $117.20 strike price Covered Calls position in EOG Resources Inc. (ticker EOG). My net debit limit order price (stock price minus Call options price) was $115.58. I often place my limit orders below the current price to try to get a better transaction execution price than what the stock and Calls are trading for at the time my order is placed. Plus, the Implied Volatility of the options prices often increases somewhat as the stock price declines, in which case an enhanced options premium is received which results in a higher potential annualized return-on-investment than would have occurred if a buy/write market order was placed instead of a limit order. This limit order approach means that frequently these day orders are never executed, but it did execute for this EOG Covered Calls position when the stock price had declined substantially today (by 4.2% compared with its prior market closing price last Friday).
Two hundred shares were purchased at $124.13 and two January 20th, 2023 $117.20 strike price Call options were sold at $8.55 per share. The corresponding extrinsic value (i.e. time value) was $1.62 per share [$8.55 Call options premium - ($124.13 stock purchase price - $117.20 strike price)]. In addition to this $1.62 profit potential from the Calls, there is an intervening ex-dividend prior to the options expiration date on January 13th) at $.825 per share (2.7% annual dividend yield) which is included in the potential return-on-investment results shown below. The Implied Volatility of the Call options was 40.3 and the Delta was approximately 73.9 when this position was established. Also as preferred, there is no quarterly earnings report prior to the options expiration date.
Some key numbers for this EOG Resources Inc. Covered Calls position are:
Covered Calls Net Investment: $23,117.34
= ($124.13 - $8.55) x 200 shares + $1.34 commission
1. If Assigned Early on the Day Before the January 13th Ex-Dividend Date:
Time Value Profit: $322.66 = $1.62 time value x 200 shares - $1.34 commission
Days Until the January 13th, 2023 Options Expiration: 10
Absolute Return-on-Investment if Assigned Early (on day prior to ex-dividend date): +1.4%
= ($322.66 profit/$23,117.34 net investment)
Annualized Return-on-Investment (If Assigned Early): +50.9%
= ($322.66 profit/$23,117.34) x (365 days/10 days)
2. If Assigned on the January 20th, 2023 Options Expiration Date:
Time Value Profit: $322.66 = $1.62 time value x 200 shares - $1.34 commission
Dividend Income if Assigned on the Options Expiration Date: $165.00 = $.825 per share x 200 shares
Total Potential Profit: $487.66 = $322.66 time value profit + $165.00 dividend income
Days Until the January 20th, 2023 Options Expiration: 18
Absolute Return-on-Investment (If Assigned at the Jan. 20th Expiration): +2.1%
= $487.66/$23,117.34
Annualized Return-on-Investment (If Assigned at the Jan. 20th Expiration): +42.8%
=($487.66/$23,117.34) x (365 days/18 days)
Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net
