This position uses my Dividend Capture Strategy since Home Depot has an upcoming quarterly ex-dividend of $2.09 per share on March 8th which is prior to the March 17th options expiration. This is equivalent to an annualized dividend yield of 2.9% (at the $291.33 stock price) and an equivalent annualized dividend yield of 15.4% = [($2.09/$291.33) x (365/17 days to expiration)] for the 17 days duration of this position. This dividend is included in the detailed return-on-investment calculations shown below. Either an early assignment on the day prior to the ex-dividend date or on the March 17th options expiration date would be desirable to the Covered Calls Advisor given the potential annualized return-on-investment results for either outcome.
Home Depot's 2022 Q4 earnings were reported eight days ago. They slightly exceeded total revenue compared with the same quarter in the prior year but missed analysts' estimate (but by only 0.4%) and regarding earnings per share, they achieved slight beats when compared against both last year and also analysts' estimate. However, for this year they are raising employee salaries to retain their workforce even while envisioning a more cautious consumer which is likely to adversely effect their margins slightly. This guidance spooked some investors and the stock has declined by 8.4% (equivalent to a huge $27.6 billion decline in market cap) since this earnings report. This seems like an over-reaction to the downside, so I decided to establish this Home Depot Covered Call position today. Also, although I normally depend almost exclusively on fundamental factors in deciding what stocks to purchase, a minor consideration
is sometimes given to technical factors. In that regard, the 2-day Relative
Strength Index [i.e. RSI(2)] for Home Depot moved deep into short-term oversold
territory at a very low reading of 7.6 today when this position was established. (Note: below 30 is normally considered as
oversold and above 70 is considered overbought).
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 Slightly Bearish, so the appropriate Covered Calls strategy is to sell in-the-money strike prices. The Delta for these Call options was 77.9 when this position was established which is a close approximation of 77.9% 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:
- +0.6% absolute return (equivalent to +32.7% annualized
return for the next 7 days) if the stock is assigned early (business day
prior to the March 8th ex-dividend date).
- +1.4% absolute return (equivalent to +29.6% annualized return over the next 17 days) if the stock is assigned on the March 17th, 2023 options expiration date.
Home Depot Inc. (HD) -- New Covered Call Position
The buy/write transaction was:
3/1/2023 Bought 100 Home Depot shares @ $291.33
3/1/2023 Sold 1 Home Depot 3/17/2023 $280.00 Call option @ $13.08
Note: Implied Volatility (IV) of the Call options was at 24.4 when this position was established.
3/8/2023 Upcoming quarterly ex-dividend of $2.09 per share
Two possible overall performance results (including commissions) for this Home Depot Covered Call position are as follows:
Covered Calls Cost Basis: $27,825.67
= ($291.33 - $13.08) * 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: +$1,307.33
= ($13.08 * 100 shares) - $.67 commission
(b) Dividend Income (If option exercised early on March 7th, 2023, the business day prior to the March 8th ex-div date): +$0.00; or
(b) Dividend Income (If Home Depot stock assigned at March 17th, 2023 options expiration): +$209.00
= ($2.09 dividend per share x 100 shares)
+($280.00 - $291.33) * 100 shares; or
(c) Capital Appreciation (If shares assigned at $280.00 strike price at options expiration): -$1,133.00
+($280.00 - $291.33) * 100 shares
As shown in items 8 and 9 in the table below, either outcome provides a satisfactory return-on-investment result for this Home Depot investment. These returns will be achieved as long as the stock is above the $280.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $276.16 ($291.33 -$13.08 -$2.09) provides 5.2% 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 Home Depot Inc. Covered Call position.
