The potential time value profit is $1.26 per share [$6.55 Call option premium - ($121.29 stock purchase price - $116.00 strike price)]. In addition to this $1.26 per share time value profit potential, there is an upcoming quarterly ex-dividend income potential per share of $.75 (annual dividend yield of 2.5%) on February 15th, 2023. The $.75 dividend is a large 29.3% increase above the quarterly dividend level during the same quarter last year. A Board of Directors that raises their dividend is showing confidence that the company's business outlook is strong.
The two potential return-on-investment results detailed below are: (1) the possibility of early assignment since the Feb. 15th ex-dividend is prior to the February 24th, 2023 options expiration date; and (2) the possibility that this Covered Call position is in-the-money (and therefore assigned) on the options expiration date. The $.75 dividend is a large 29.3% increase above the quarterly dividend level during the same quarter last year. A Board of Directors that raises their dividend is showing confidence that the company's business outlook is strong.
Marathon Petroleum Corp.'s Q4 2022 earnings report eight days ago included a +12.7% revenue increase compared with the same quarter last year and an extraordinary increase in earnings per share from $1.30 last year to $6.65 this year. Their full fiscal year 2022 EPS was $26.56, so at today's stock purchase price of $121.29, the FY2022 P/E Ratio is only 4.6 which is a substantially better valuation than its prior 5-year average of 9.8. It appeared in both my Energy Sector and my Acquirers' Multiple stock screeners. Also, according to Reuters Research, eleven of sixteen analysts covering Marathon Petroleum rate it as either a Buy or Outperform, five rate it as a Hold, and none rate it as either Underperform or Sell, and their average price target is $143.21 (+18.1% above today's purchase price).
Marathon is among the largest of U.S.-based refiners. In addition to its attractive current valuation relative to its history, it has tremendous cash flow. Its current free cash flow yield of 22.3% is more than double its prior 5-year average. Historically, crack spreads have fluctuated substantially which resulted in dramatic swings in refiners' profit margins. But the current crack spread is likely to be more sustainable going forward since (1) there is now a more persistent competitive advantage in comparison to European refiners; and (2) there are no new refineries planned, so the current refined energy products supply/demand imbalance (i.e. stagnant supply but continued slow growth in demand) is also likely to persist for several more years.
As detailed below, two potential return-on-investment results are:
- +1.1% absolute return (equivalent to +57.0% annualized return for the next 7 days) if the stock is assigned early (on the last business day prior to the February 15th, 2023 ex-dividend date); OR
- +1.7% absolute return (equivalent to +37.5% annualized return over the next 17 days) if the stock is assigned on the February 24th options expiration date.
Marathon Petroleum Corp. (MPC) -- New Covered Call Position
2/8/2023 Bought 100 Marathon Petroleum Corp. shares @ $121.29
2/8/2023 Sold 1 MPC 2/24/2023 $116.00 Call option @ $6.55 per share
Note: the Implied Volatility of the Call options was 31.6 when this buy/write transaction was executed. As preferred, this exceeds the Implied Volatility of a comparable Delta for a S&P 500 (i.e. SPY) Covered Calls position (whose Implied Volatility is currently 23.2).
2/15/2023 Upcoming quarterly ex-dividend of $.75 per share
Two possible overall performance results (including commissions) for this Covered Calls position are as follows:
Covered Call Net Investment: $11,474.67
= ($121.29 - $6.55) * 100 shares + $.67 commission
Net Profit Components:
(a) Options Income: +$654.33
= ($6.55 * 100 shares) - $.67 commission
(b) Dividend Income (If option exercised early on Feb. 14th, the last business day prior to the February 15th ex-div date): +$0.00; or
(b) Dividend Income (If MPC stock assigned at the Feb. 24th, 2023 expiration): $75.00
= ($.75 dividend per share x 100 shares)
(c) Capital Appreciation (If Marathon Petroleum Call option is assigned early on Feb. 14th): -$529.00
+($116.00 strike price - $121.29 stock price) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $116.00 strike price at the Feb. 24th options expiration): -$529.00
+($116.00 - $121.29) * 100 shares
Either
outcome provides a good return-on-investment result for this
Marathon Petroleum investment. These returns will be achieved as long as the stock is
above the $116.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $113.99 ($121.29 -$6.55 -$.75)
provides a large 6.0% downside protection below today's purchase
price.
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 Marathon Petroleum Corp. position, all nine criteria were met.
