APA Corporation (formerly known as Apache Corporation) is an $11.3 billion market capitalization independent natural gas, oil, and natural gas liquids exploration and production company based in Houston with operations in the U.S. (primarily in the Permian Basin), Egypt, the North Sea, and Suriname. It holds a majority interest in Altus Midstream, which, through its consolidated subsidiaries, operates gathering, processing and transmission assets in West Texas and holds equity ownership in four Permian-to-Gulf Coast pipelines. Their FY2023 estimated P/E Ratio is very attractive at only 8.1 and they have beat earnings estimates for each of the last 4 quarters. The twenty-eight Wall Street analysts that now cover APA believe that the stock is currently undervalued since their average target price is $45.96 which has +26.8% upside potential above today's purchase price. As preferred, the Implied Volatility of these Call options was 35.5 which is well above that of the S&P 500 Implied Volatility (i.e.VIX) which is currently only 13.7. The Delta was 70.6 when this position was established, which approximates a 70.6% probability that the Calls will expire in-the-money on the July 28th, 2023 options expiration date.
CVS Health Corporation has its roots in retail pharmacy, primarily in the U.S. where it operates about 9,000 retail stores. It is the largest pharmacy benefit manager and processes about 2 billion prescriptions annually. Through acquisitions it has become a top-tier vertically integrated healthcare company. In 2017 they acquired health insurer Aetna which serves about 24 million members. They entered the home healthcare area with last year's acquisition of Signify Health and this year they entered the primary care business by acquiring Oak Street Health. CVS' current market capitalization is $91.5 billion, but the stock has suffered this year with a decline of 25%. Although I applaud the benefits toward the long-term success of the company, their large acquisitions described above means that their long-term debt has remained stubbornly high at $56.5 billion at the end of the most recent quarter. Analysts that follow CVS think that this year's sell-off in the stock price is overdone. The average target price of the twenty-five analysts covering CVS is $95.52 -- fully +35.4% above today's purchase price. The Delta was 74.7 when this position was established, which approximates a 74.7% probability that the Calls will expire in-the-money on the July 28th, 2023 options expiration date.
As detailed below, the potential return-on-investment results for these Covered Calls positions are:
- For APA Corporation: +1.3% absolute return-on-investment (equivalent to +154.9% annualized return-on-investment for the next 3 days) in the relatively unlikely event that the stock is assigned early (last trading day prior to the July 20th ex-dividend date); OR (2) +2.0% absolute return-on-investment (equivalent to +60.7% annualized return-on-investment for the next 12 days) if the stock is assigned on its July 28th options expiration date.
- For CVS Health Corporation: +0.4% absolute return-on-investment (equivalent to +48.4% annualized return-on-investment for the next 3 days) if the stock is assigned early (last trading day prior to the July 20th ex-dividend date); OR (2) +1.3% absolute return-on-investment (equivalent to +38.9% annualized return-on-investment over the next 12 days) if the stock is assigned on its July 28th options expiration date.
1. APA Corporation (APA) -- New Covered Calls Position
7/17/2023 Bought 500 APA Corporation shares @ $36.24
7/17/2023 Sold 5 APA 7/28/2023 $35.00 Call options @ $1.68 per share
Note: A simultaneous buy/write transaction was executed.
7/20/2023 Upcoming quarterly ex-dividend of $.25 per share
Two possible overall performance results (including commissions) for this APA Corporation Covered Calls position are as follows:
APA Covered Calls Net Investment: $17,283.35
= ($36.24 - $1.68) * 500 shares + $3.35 commissions
Net Profit Components:
(a) Options Income: +$840.00
= ($1.68 * 500 shares)
(b) Dividend Income (If option exercised early on the business day prior to the July 20th ex-div date): +$0.00; or
(b) Dividend Income (If APA shares assigned at the July 28th, 2023 options expiration date): +$125.00
= ($.25 dividend per share x 500 shares)
(c) Capital Appreciation (If APA assigned early on July 19th, 2023): -$620.00
+($35.00 - $36.24) * 500 shares; or
(c) Capital Appreciation (If APA assigned at the $35.00 strike price at the July 28th, 2023 options expiration): -$620.00
+($35.00 -$36.24) * 500 shares
Either outcome would provide an excellent return-on-investment result. These returns will be achieved as long as the stock is above the $35.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $34.31 ($36.24 -$1.68 -$.25) provides 5.3% 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 APA Corporation Covered Calls position.
2. CVS Health Corporation (CVS) -- New Covered Calls Position
7/17/2023 Bought 400 CVS shares @ $70.57 per share
7/17/2023 Sold 4 CVS 7/28/2023 $69.00 Call options @ $1.85 per share
7/20/2023 Upcoming quarterly ex-dividend of $.605 per share
Two possible overall performance results (including commissions) for this CVS Health Covered Calls position are as follows:
CVS Covered Calls Net Investment: $27,490.68
= ($70.57 - $1.85) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$737.32
= ($1.85 * 400 shares) - $2.01 commission
(b) Dividend Income (If option exercised early on July 19th, the last business day prior to the 7/20/2023 ex-div date): +$0.00; or
(b) Dividend Income (If CVS stock assigned at the July 28th, 2023 options expiration date): +$242.00
= ($.605 dividend per share x 400 shares)
= +($69.00 strike price - $70.57 stock purchase price) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $69.00 strike price at the 7/28/2023 options expiration): -$628.00
= +($69.00 - $70.57) * 400 shares
Either outcome provides a good annualized return-on-investment result -- well above the minimum desired 25.0% aroi for positions with from 10 to 19 days remaining until expiration [see item 9(c) in the table with 9 criteria below]. These returns will be achieved as long as the stock is above the $69.00 strike price on the options expiration date. However, if the stock declines below the strike price, the breakeven price of $68.115 ($70.57 - $1.85 -$.605) provides 3.5% 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. All nine criteria are achieved for this CVS Health Corporation Covered Calls position.
Note: Criteria #3 is the "Equivalent Annualized Dividend Yield (at the stock purchase price) must exceeds 5.0%." For this CVS position, the Equivalent Annualized Dividend Yield of 26.1% which is calculated as ($.605/$70.57) x (365/12 days)] which in this CVS position greatly exceeds the minimum threshold in this case since it exceeds 5.0% minimum for this criteria.
