A June 2nd, 2023 Covered Calls buy/write limit order was executed this morning in U.S. Bancorp (ticker USB) at a net debit price of $27.03 per share. Four hundred shares were purchased at $30.12 and four June 2nd, 2023 $27.50 strike price Call options were sold at $3.09 per share. The corresponding extrinsic value (i.e. time value) profit potential was $.47 per share [$3.09 Call options premium - ($30.12 stock purchase price - $27.50 strike price)]. As desired, there is no quarterly earnings report prior to the options expiration date.
U.S. Bancorp is the fifth largest bank in the U.S. by total assets ($675 billion) and its recent price decline in sympathy with the widespread decline in bank stocks triggered by the Silicon Valley Bank and Signature Bank failures seems to have gone too far for a high-quality bank like U.S. Bancorp. The Implied Volatility of the Call options sold was very high at 59.2 when this transaction was executed which provided a nice premium income for the Call options sold and, as shown below, an attractive maximum potential annualized return-on-investment of +39.1%. The probability that the Calls will be in-the-money and therefore the stock called away (i.e. sold) on the options expiration date was 76.8% when this position was established.
U.S. Bancorp appeared in my Financial Sector stock screener results. Its current valuation is attractive relative to its prior 5-year averages, both in terms of its forward FY2023 P/E Ratio estimate of 6.5 (versus 11.8 historically) and its Price/Tangible Book Value of 1.4 (versus 2.0 historically). Their commercial real estate loans portfolio is only 13% of total loans which is well below the average for other regional banks and their overall loan-to-deposit ratio remains strong. Wall Street analysts' that follow U.S. Bancorp have an average target price of $44.23 (+46.8% above today's stock purchase price) and Morningstar currently rates USB as their #1 "best value stock to buy for the long term".
Some key numbers for this U.S. Bancorp Covered Calls position are:
Covered Calls Net Investment: $10,814.68
= ($30.12 - $3.09) x 400 shares + $2.68 commissions
If Assigned on the June 2nd, 2023 Options Expiration Date:
Total Potential Profit: $185.32
= ($.47*400 shares - $2.68 commissions) time value profit
Calendar Days Until the June 2nd, 2023 Options Expiration: 16
Absolute Return-on-Investment if Assigned at Expiration: +1.7%
= $185.32 total profit potential /$10,814.68 net investment
=Annualized Return-on-Investment if Assigned at Expiration: +39.1%
= ($185.32/$10,814.68) x (365/16 days)
Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net
