Discover also has an upcoming ex-dividend date next Wednesday (6 days from today) at $.62 per share (2.2% annual dividend yield), so this is included in the potential return-on-investment results detailed below. This Covered Calls position is consistent with my preference to establish Covered Calls in low-growth sectors (such as this one in the Financials sector) using my Dividend Capture Strategy. With this strategy it is possible to achieve an attractive annualized return-on-investment result if either the position is assigned on the options expiration date or if it is assigned early (normally on the day prior to the ex-dividend date). Also, because of the volatility immediately after quarterly earnings reports are released, it is preferred that there be no quarterly earnings report prior to the options expiration date, and this is true for this Discover Financial position since the next earnings report is not until April 26th, 2023. The approximate probability of assignment was 69.8% when this position was established.
Two potential return-on-investment results are as follows: (a) +0.9% absolute return-on-investment (equivalent to +54.3% annualized roi) for 6 days if this Covered Calls position is assigned early on February 21st, 2022 (the last business day prior to the Feb. 22nd ex-dividend date); OR (b) +1.5% absolute return-on-investment (equivalent to +33.3% annualized roi) for 16 days if this Covered Calls position is in-the-money on the March 3rd, 2023 weekly options expiration date.
Discover Financial Services (DFS) -- New Covered Calls Position Established
The simultaneous buy/write transaction was as follows:
2/16/2023 Bought 200 shares of Discover Financial Services @ $113.00 per share; and
2/16/2023 Sold 2 DFS March 3rd, 2023 $110.00 Call options @ $3.98 per share. The Implied Volatility of these Calls was 22.3 when this position was established.
2/22/2022 Ex-dividend of $.62 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $21,805.34
= ($113.00 - $3.98) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$794.66
= ($3.98 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on the last business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If DFS shares assigned at the March 3rd, 2023 expiration): +$124.00
= ($.62 dividend per share x 200 shares)
(c) Capital Appreciation (If Discover shares assigned early): -$600.00
+($110.00 strike price - $113.00 stock purchase cost) * 200 shares; or
(c) Capital Appreciation (If DFS shares assigned at $110.00 strike price at options expiration): -$600.00
+($110.00 - $113.00) * 200 shares
Either outcome would provide a very good return-on-investment result. These returns will be achieved as long as the stock is above the $110.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $108.40 ($113.00 -$3.98 -$.62) provides 4.1% downside protection below today's purchase price.
The Covered Calls Advisor has established a set of nine criteria to evaluate potential Covered Calls using a dividend capture strategy. The minimum threshold desired to establish a position is that at least eight of these nine criteria must be achieved. As shown in the table below, all nine criteria are achieved for this Discover Financial Services Covered Calls position.
