There is an upcoming ex-dividend of $.825 per
share (2.8% annual dividend yield) on April 13th, 2023 (prior to the April 21st options expiration date). So, two potential return-on-investment results for this position are detailed below:
(1) Early exercise on the day prior to the April 13th, 2023 ex-dividend date; OR
(2) Assignment on the April 21st, 2023 options expiration date. So, this position is evaluated in the table at the bottom of this post to determine how many of the 9 criteria in the Covered Calls Advisor's Dividend Capture Strategy would be met by this Covered Calls position if it were to be established. In this case, all nine criteria were met so a new Covered Calls position in EOG Resources was established.
Given the Covered Calls Advisor's current Slightly Bearish Overall Market Meter outlook, an in-the-money Covered Calls
position was established -- the Delta was 74.2 when this position was established, which approximates a
probability of 74.2% that the Call options will be
in-the-money on the options expiration date. According to Reuters Research, EOG is covered by 31 brokerage firm analysts and their average target price is $146.18 which is +22.6% above
today's purchase price. The trailing twelve months earnings per share was $13.75--a P/E ratio of 8.7 based on today's stock purchase price and below the prior 5-year average P/E ratio of 11.1. Estimates for this year's P/E ratio takes it back near its historic average of 11.0. Given the great uncertainty with future oil prices, the 2023 EPS estimate is unreliable, but even if WTI declines from its current approximate $80 per barrel, continued strong profitability of domestic exploration and production companies (like EOG) should help its stock price. Also, EOG appeared today in the Covered Calls Advisor's 'Energy Sector' stock screener.
As detailed below, a potential return-on-investment result is +0.9% absolute return (equivalent to +41.7% annualized return for the next 8 days) if the stock is assigned early (business day prior to the April 13th ex-date); OR +1.6% absolute return (equivalent to +35.3% annualized return-on-investment over the next 17 days) if the stock is assigned on the April 21st, 2023 options expiration date. I want to continue to diversify my current holdings among sectors and my sole current Energy sector position in Valero Energy is likely to be assigned at its options expiration date tomorrow. Also, since many Energy sector companies have good dividend yields, I prefer to establish Covered Calls positions using my Dividend Capture Strategy in this Energy Sector.
Another key reason I want to use the Dividend Capture Strategy when there is an intervening ex-dividend prior to the options expiration date is that (as is the case with this EOG position), the potential annualized return-on-investment results for Covered Calls is greater than that of its comparable 100% Cash-Secured Puts position. For example, in this EOG position the $1.865 maximum potential profit ($1.04 time value plus $.825 ex-dividend) for this Covered Calls positions greatly exceeds the $1.53 that would have been available at the same time from selling the comparable Puts.
EOG Resources Inc. (EOG) -- New Covered Calls Position
The buy/write transaction today was as follows:
4/5/2023 Bought 200 EOG Resources Inc. shares @ $119.23
4/5/2023 Sold 2 EOG 4/21/2023 $114.00 Call options @ $6.27 per share.
4/13/2023 Upcoming regular ex-dividend of $.825 per share.
Two possible overall performance results (including commissions) for this EOG Resources Covered Calls position are as follows:
Covered Calls Net Investment: $22,593.34
= ($119.23 - $6.27) * 200 shares + $1.34 commissions
Net Profit Components:
(a) Options Income: +$1,252.66
= ($6.27 * 200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on the business day prior to the April 13th ex-div date): +$0.00; or
(b) Dividend Income (If EOG shares assigned at the April 21st, 2023 options expiration): +$165.00
= ($.825 dividend per share x 200 shares)
(c) Capital Appreciation (If EOG shares assigned early on April 13th, 2023): -$1,046.00
+($114.00 - $119.23) * 200 shares ;or
(c) Capital Appreciation (If EOG shares assigned at $114.00 strike price at options expiration): -$1,046.00
= +($114.00 - $119.23) * 200 shares
These returns will be achieved as long as the stock is
above the $114.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $112.135 ($119.23 -$6.27 -$.825)
provides 6.0% downside protection below today's purchase
price.
You will notice that the Covered Calls Advisor always calculates
potential return-on-investment results (using "annualized-return-on-investment") BEFORE establishing any Covered Call
position. This approach enables us to obtain a good perspective on whether or not the potential annualized-return-on-investment results (including their associated probability of assignment) provides a risk/reward profile that qualifies as a potential investment if it meets or exceeds the minimum thresholds specified in criteria 8 and 9 in the Dividend Capture Strategy table below.
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 met for this EOG Resources Inc. Covered Calls position.
