Covered Calls Established in Energy Select Sector SPDR Fund ETF

A Covered Calls position was established this afternoon in the Energy Select Sector SPDR Fund ETF (ticker XLE), with a June 30th, 2023 quarterly options expiration date. Three hundred shares of the Energy Select Sector SPDR Fund were purchased at $79.58 and three 6/30/2023 Call options were sold at $2.23 per share at the $78.00 strike price.  This position was established after the Federal Reserve announcement of a pause in the current 5.0% to 5.25% Federal Funds rate and at a time when the Dow had declined by 420 points during afternoon trading.  It is difficult to establish positions when the market and stock prices are declining, but often these are opportune times to buy into positions that we believe have become fundamentally undervalued (at least temporarily).  The Implied Volatility of these Call options was 20.4 when this position was transacted which, as preferred by the Covered Calls Advisor, is above that of the S&P 500 Volatility Index (i.e. VIX) which is currently at 14.0.

The time value was $.65 per share [$78.00 strike price - ($79.58 share price - $2.23 options premium)] when this net debit buy/write limit order transaction was executed.  XLE also goes ex-distribution in six days on June 20th, 2023.  The exact amount of the XLE distribution is not pre-announced, but based on prior quarterly distributions, I estimate it will be approximately $.80 per share.  

Given my current Slightly Bearish Overall Market Meter rating, the current strategy is to establish Covered Calls between 2.0% and 5.0% in-the-money.  The Delta was 67.2 when this position was established, which is a good approximation of the probability that XLE will close in-the-money (and therefore be assigned at the strike price) on the June 30th options expiration date.  This corresponds to a 2.0% [($79.58 stock purchase price - $78.00 strike price)/$78 .00 strike price] in-the-money position which is within the desired 2.0% to 5.0% in-the-money range given my current cautious market viewpoint.

As detailed below, a potential return-on-investment result is +0.8% absolute return (equivalent to +50.6% annualized return for the next 6 days) if the XLE equite is assigned early on the last day prior to the June 20th ex-distribution date; OR +1.9% absolute return (equivalent to +40.1% annualized return over the next 17 days) if the stock is assigned on the June 30th, 2023 options expiration date.

Energy Select Sector SPDR Fund ETF (XLE) -- New Covered Calls Position
The buy/write transaction today was as follows:
6/14/2023 Bought 300 Energy Select Sector SPDR Fund ETF shares @ $79.58 per share.
12/15/2022 Sold 3 XLE 6/30/2023 $78.00 Call options @ $2.23 per share.  The Delta for these Calls was 67.2 when this buy/write position was established.

12/19/2022 Upcoming quarterly ex-distribution estimated at $.80 per share.

Two possible overall performance results (including commissions) for this Energy Select Sector SPDR Fund ETF Covered Calls position are as follows:
Covered Calls Net Investment: $23,207.01
= ($79.58 - $2.23) * 300 shares + $2.01 commissions

Net Profit Components:
(a) Options Income: +$666.99
= ($2.23 * 300 shares) - $2.01 commissions
(b) Distribution Income (If option exercised on the last business day prior to the June 20th ex-distribution date): +$0.00; or
(b) Distribution Income (If XLE shares assigned at the June 30th, 2023 options expiration): +$240.00
= ($.80 estimated distribution per share x 300 shares)
(c) Capital Appreciation (If XLE shares assigned early): -$474.00
+($78.00 - $79.58) * 300 shares ;or
(c) Capital Appreciation (If shares are in-the-money and therefore assigned at the $78.00 strike price at options expiration): -$474.00
+($78.00 - $79.58) * 300 shares

1. Total Net Profit [If options exercised on June 19th (last business day prior to the June 20th ex-distribution date)]: +$192.99

= (+$666.99 options income +$0.00 distribution income - $474.00 capital appreciation); or

2. Total Net Profit (If XLE shares assigned at $78.00 strike price at the June 30th, 2023 expiration): +$432.99

= (+$666.99 options income + $240.00 distribution income - $474.00 capital appreciation)

1. Absolute Return-on-Investment [If XLE Call options exercised on final business day prior to ex-distribution date]: +0.8%

= +$192.99/$23,207.01 

Annualized Return-on-Investment (If options exercised early): +50.6%

= (+$192.99/$23,207.01) * (365/6 days); or

2. Absolute Return-on-Investment (If XLE shares assigned at $78.00 strike price on the June 30th, 2023

options expiration date): +1.9%

= +$432.99/$23,207.01

Annualized Return-on-Investment (If XLE shares assigned at $78.00 at the June 30th, 2023 expiration): +40.1%

= (+$432.99/$23,207.01) * (365/17 days)

These returns will be achieved as long as the XLE price is above the $78.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $76.55 ($79.58 -$2.23 -$.80) provides 3.8% downside protection below today's purchase price.