Today a Covered Calls position was established in Fastenal Company (ticker symbol FAST) when 400 shares were purchased at $48.96 and 4 February 17th, 2023 Call options were sold at $2.06 per share at the $47.50 strike price. The net debit limit order at $46.90 was executed, so the time value was $.60 per share [$2.06 Call options premium - ($48.96 stock purchase price - $47.50 strike price)].
There is an upcoming quarterly ex-dividend of
$.35 (annual dividend yield of 2.9%) next Wednesday, February 1st, so two potential
return-on-investment results for this position, as detailed below,
include the possibility of early assignment because the ex-dividend is
prior to the February 17th, 2023 options expiration date. Fastenal is a Dividend Contender (between 10 and 24 consecutive years of dividend increases) since it has now achieved 23 consecutive years of increases and is likely to join with other Dividend Aristocrats when it reaches 25 consecutive years of dividend increases.
Given my current Overall Market Meter indicator of
Slightly Bearish, an in-the-money Covered Calls position was established
with a Delta of 68.1. When Slightly Bearish, my guideline is to sell between 2.0% and 5.0% in-the-money strike prices and this position is 3.1% in-the-money.
Fastenal is a leading distributor of industrial and construction supplies (including fasteners). Their Q4 2022 EPS were reported six days ago, which increased by +7.5% compared with the same quarter last year. Since total stock market earnings this quarter are expected to be flat versus last year, my preference is to consider companies that exceed their quarterly EPS results versus last year by at least 6.0%. Their TTM P/E ratio is 25.7 which, since I am primarily a valuation-oriented investor, is higher than I'm normally comfortable with. However, their prior 5-year median P/E ratio is 27.3, so the 25.7 was not a deal breaker.
As detailed below, two potential return-on-investment results are:
- +1.3% absolute return (equivalent to +66.0% annualized return for the next 7 days) if the stock is assigned early (on the last business day prior to the February 1st ex-dividend date); OR
- +2.0% absolute return (equivalent to +30.6% annualized return over the next 24 days) if the stock is assigned on the February 17th options expiration date.
Fastenal Company (FAST) -- New Covered Calls Position
01/25/2023 Bought 400 Fastenal Co. shares @ $48.96
01/25/2023 Sold 4 Fastenal 2/17/2023 $47.50 Call options @ $2.06 per share
Note: the Implied Volatility of the Call options was 25.1 when this buy/write transaction was executed.
2/1/2023 Upcoming quarterly ex-dividend of $.35 per share
Two possible overall performance results (including commissions) for this Fastenal Covered Calls position are as follows:
Covered Calls Cost Basis: $18,762.68
= ($48.96 - $2.06) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$821.32
= ($2.06 * 400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on January 31st, the last business day prior to the February 1st ex-div date): +$0.00; or
(b) Dividend Income (If Fastenal stock assigned at the Feb. 17th, 2023 expiration): $140.00
= ($.35 dividend per share x 400 shares)
(c) Capital Appreciation (If Fastenal Call options assigned early on Feb. 1st): -$584.00
+($47.50 strike price - $48.96 stock price) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $47.50 strike price at the Feb. 17th options expiration): -$584.00
+($47.50 - $48.96) * 400 shares
