Today a Covered Calls position was established in CVS Health Corp. (ticker symbol CVS) when the Covered Calls Advisor's buy/write limit order was executed -- 200 shares were purchased at $89.83 and two January 27th, 2023 Call options were sold at $2.81 at the $88.00 strike price, therefore a net debit price of $87.02 which is a time value of $.98 per share [$2.81 options price - ($89.83 stock price - $88.00 strike price)]. This is a moderately in-the-money position since it was established at a price 2.1% above
the $88.00 strike price. The Delta was 65.4 when this Covered Calls position was established -- which approximates the probability that the Call options will be in-the-money on the options expiration date.
Two potential return-on-investment results for this position are highlighted below and includes the possibility of early assignment since a quarterly ex-dividend of $.605 per share (2.7% annualized dividend yield) goes ex-dividend on January 19th, which is prior to the January 27th options expiration date. The stock would have to move up in price by the last business day prior to the Jan. 19th ex-div date and by an amount that would cause the time value remaining in the option to decline from its $.98 value today to about $.15 or less. If this occurs, the owner of the Call options might exercise their right to purchase the stock at the $88.00 strike price, in which case the options would immediately expire worthless but the owner of the Calls would then own the stock and would capture the dividend. This outcome would be a desirable one for the Covered Calls Advisor since (as shown in the detailed calculations below) the early assignment +45.4% annualized return-on-investment (aroi) is greater than the +36.8% aroi that would be achieved if the Covered Calls position were instead assigned on its January 27th, 2023 options expiration date. Another positive feature of this position is that the next quarterly earnings report on February 8th, 2023 is after the January 27th options expiration date.
The Covered Calls Advisor views CVS as a uniquely positioned 3-in-1
health services company. Its 9,900 retail drugstores contribute about
29% of total revenue, pharmacy benefits management (46%), and its Aetna
health insurance (25%). Only a few competitors have even two of the
three business lines that CVS has -- United Healthcare, Cigna (who owns
Express Scripts), and Walmart.
CVS is rated, on average, as Outperform by the 26 Wall Street analysts that cover it and their average target price is $116.53 (+29.7% above today's purchase price). CVS' valuation is attractive with its trailing-twelve-months P/E Ratio at 10.3 and its planned future long-term EPS growth rate of "low double-digits" (which is higher than its current P/E Ratio).
As detailed below, two potential return-on-investment results are:
- +1.1% absolute return (equivalent to +45.4% annualized return for the next 9 days) if the stock is assigned early (business day prior to the January 19th ex-dividend date); OR
- +1.8% absolute return (equivalent to +36.8% annualized return over the next 18 days) if the stock is assigned on the January 27th, 2022 options expiration date.
CVS Health Corp. (CVS) -- New Covered Calls Position
1/10/2023 Bought 200 CVS shares @ $89.83
1/10/2023 Sold 2 CVS 1/27/2023 $88.00 Call options @ $2.81
1/19/2023 Upcoming quarterly ex-dividend of $.605 per share
Two possible overall performance results (including commissions) for this CVS Health Covered Calls position are as follows:
Covered Calls Net Investment: $17,405.34
= ($89.83 - $2.81) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$560.66
= ($2.81 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on January 18th, the last business day prior to the January 19th ex-div date): +$0.00; or
(b) Dividend Income (If CVS stock assigned at the January 27th, 2023 options expiration date): +$121.00
= ($.605 dividend per share x 200 shares)
+($88.00 strike price - $89.83 stock purchase price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $85.00 strike price at options expiration): -$366.00
+($88.00 - $89.83) * 200 shares
Either outcome provides a good annualized return-on-investment result -- well above the minimum desired 25.0% aroi for positions with from 10 to 19 days remaining until expiration. These returns will be achieved as long as the stock is above the $88.00 strike price on the options expiration date. However, if the stock declines below the strike price, the breakeven price of $86.415 ($89.83 -$2.81 -$.605) provides 3.8% 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. All nine criteria are achieved for this CVS Covered Calls position.
Note: Criteria #3 is the "Equivalent Annualized Dividend Yield (at the stock purchase price) must exceeds 5.0%." For this CVS position, the Equivalent Annualized Dividend Yield of 13.7% which is calculated as ($.605/$89.83) x (365/18 days)] which in this CVS position achieves the objective in this case since it exceeds the minimum 5.0% threshold for this criteria.
