This position uses the Covered Calls Advisor's Dividend Capture Strategy since Lowe's has an upcoming quarterly ex-dividend of $1.05 per share one week from today (on January 24th) which is prior to the February 3rd options expiration date. This is equivalent to an absolute annual dividend yield of 2.0% and an equivalent annualized dividend yield of 10.1% = [($1.05/$210.86) x (365/18 days to expiration)]. This dividend is included in the detailed return-on-investment calculations below. Either an early assignment on the day prior to the ex-dividend date or on the February 3rd expiration date would be desirable to the Covered Calls Advisor given the potential annualized return on investments for either outcome. Importantly to the Covered Calls Advisor, there is no quarterly earnings report prior to the options expiration date since the next earnings report on February 28th is after the 2/3/2023 options expiration date.
Lowe's is in the top 1% of companies in my Large-Cap (>$10B market cap) Multifactor (Value+Profitability+Quality+Growth+Momentum) Stock Screener. It is also outperform rated by the 32 analysts' that cover it. They have a current average target price of $236.95 (+12.4% above today's purchase price). One of my recommended websites (shown in the right sidebar of this homepage) is Validea's Guru Investor Blog. They recently published an interesting article related to Multifactor Stock Screening here.
As shown on the table at the bottom of this post, all nine criteria of
the Dividend Capture Strategy are met
with this position. The Covered Calls Advisor's current Overall Market Meter outlook remains cautious, so the appropriate Covered Calls strategy is to sell in-the-money strike prices. Even if the stock market declines somewhat during the next 18 days until the options expiration date, if Lowe's also declines by a modest amount and remains above the $202.50 strike price, then a very satisfactory annualized-return-on-investment of +29.8% will be achieved. The Delta for these Call options was 74.6 when this position was established which approximates the probability that the position will be in-the-money at market close on the options expiration date.
As detailed below, two potential return-on-investment results are:
- +0.9% absolute return (equivalent to +49.2% annualized
return for the next 7 days) if the stock is assigned early (business day
prior to the January 24th ex-dividend date).
- +1.5% absolute return (equivalent to +29.8% annualized return over the next 18 days) if the stock is assigned on the February 3rd, 2023 options expiration date.
Lowe's Companies Inc. (LOW) -- New Covered Calls PositionThe buy/write transaction was:
1/17/2023 Bought 200 Lowe's Companies Inc. shares @ $210.86
1/17/2023 Sold 2 Lowe's 2/3/2023 $202.50 Call options @ $10.26
Note: Implied Volatility (IV) of the Call options was at 27.9 when this position was transacted which, as preferred, is above the current VIX of 19.4.
1/24/2023 Upcoming quarterly ex-dividend of $1.05 per share
Two possible overall performance results (including commissions) for this Lowe's Companies Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $40,121.34
= ($210.86 - $10.26) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$2,050.66
= ($10.26 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on Jan. 23rd, 2023, the business day prior to the January 24th ex-div date): +$0.00; or
(b) Dividend Income (If Lowe's stock assigned at February 3rd, 2023 options expiration): +$210.00
= ($1.05 dividend per share x 200 shares)
+($202.50 - $210.86) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $202.50 strike price at options expiration): -$1,672.00
+($202.50 - $210.86) * 200 shares
Either outcome provides an attractive return-on-investment result for this Lowe's Companies Inc. investment. These returns will be achieved as long as the stock is above the $202.50 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $199.55 ($210.86 -$10.26 -$1.05) provides 5.4% downside protection below today's stock 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, all nine criteria are achieved for this Lowe's Companies Inc. Covered Calls position.
