Today a Covered Calls position was established in the Archer-Daniels-Midland Co. (ticker symbol ADM) at a net debit limit order of $78.35. Two hundred shares were purchased at $82.26 and 2 February 17th, 2023 Call options were sold at $3.91 per share at the $79.00 strike price. This strike price is 4.1% in-the-money which is consistent with my guideline of establishing Covered Calls between 2.0% and 5.0% in-the-money with my Slightly Bearish current Overall Market Meter sentiment. This buy/write transaction occurred at a Delta of 76.3 which approximates the probability that the Call options will be in-the-money and therefore assigned on the options expiration date.
The potential time value profit is $.65 per share [$3.91 Call options premium - ($82.26 stock purchase price - $79.00 strike price)]. In addition to this $.65 profit potential there is an upcoming quarterly ex-dividend income potential per share of $.45 (annual dividend yield of 2.2%) on February 8th, 2023. So, the two potential return-on-investment results detailed below are: (1) the possibility of early assignment since the Feb. 8th ex-dividend is prior to the February 17th, 2023 options expiration date; and (2) the possibility that this Covered Calls position is in-the-money (and therefore assigned) on the options expiration date. The $.45 dividend is a 12.5% increase above the prior year's dividend level and is ADM's 50th consecutive year of dividend increases which signifies its entry into the Dividend Kings category which it now shares with only 45 other companies.
ADM's Q4 2022 earnings report last week included +13.6% revenue and +28.7% earnings increases compared with the same quarter last year. Their full fiscal year 2022 EPS was $7.85, so at today's stock purchase price of $82.26, the TTM P/E Ratio is 10.5 which compares favorably against its prior-5-year average P/E of 13.4. Analysts' revenue estimates are flat for 2023, but ADM has beat analysts' estimates every quarter for the past 3 years. Despite their flat revenue guidance, Wall Street analysts' average target price is $102.92 (+25.1% above today's purchase price).
As detailed below, two potential return-on-investment results are:
- +0.8% absolute return (equivalent to +37.5% annualized return for the next 8 days) if the stock is assigned early (on the last business day prior to the February 8th, 2023 ex-dividend date); OR
- +1.4% absolute return (equivalent to +28.3% annualized return over the next 18 days) if the stock is assigned on the February 17th options expiration date.
Archer-Daniels-Midland Co. (ADM) -- New Covered Calls Position
01/31/2023 Bought 200 Archer-Daniels-Midland Co. shares @ $82.26
01/31/2023 Sold 2 ADM 2/17/2023 $79.00 Call options @ $3.91 per share
Note: the Implied Volatility of the Call options was 23.2 when this buy/write transaction was executed.
2/8/2023 Upcoming quarterly ex-dividend of $.45 per share
Two possible overall performance results (including commissions) for this Covered Calls position are as follows:
Covered Calls Net Investment: $15,671.34
= ($82.26 - $3.91) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$780.66
= ($3.91 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on Feb. 7th, the last business day prior to the February 8th ex-div date): +$0.00; or
(b) Dividend Income (If ADM stock assigned at the Feb. 17th, 2023 expiration): $90.00
= ($.45 dividend per share x 200 shares)
(c) Capital Appreciation (If ADM Call options assigned early on Feb. 7th): -$652.00
+($79.00 strike price - $82.26 stock price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $79.00 strike price at the Feb.17th options expiration): -$652.00
+($79.00 - $82.26) * 200 shares
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this Archer-Daniels-Midland position, eight of the nine criteria were met.
