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 December 29th, 2023 quarterly options expiration date. Three hundred shares of the Energy Select Sector SPDR Fund were purchased at $81.08 and three 12/29/2023 Call options were sold at $2.86 per share at the $79.00 strike price.  It is difficult to establish positions when WTI oil spot prices are declining, but often these are opportune times to buy into positions that we believe have become undervalued (at least temporarily).  The Implied Volatility of these Call options was 21.7 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 only 13.0.

The time value was $.78 per share [$79.00 strike price - ($81.08 share price - $2.86 options premium)] when this net debit buy/write limit order transaction was executed.  XLE also goes ex-distribution in eleven days on December 18th, 2023.  The exact amount of the XLE distribution is not pre-announced, but based on prior quarterly distributions, I estimate it will be approximately $.675 per share (3.3% annualized dividend yield).  

Given my current "Neutral" Overall Market Meter rating, the current strategy is to establish Covered Calls between 3.0% in-the-money and 2.0% out-of-the-money.  The Delta was 68.4 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 Dec. 29th options expiration date.  This corresponds to a 2.6% [($81.08 stock purchase price - $79.00 strike price)/$79 .00 strike price] in-the-money position which is within the desired range given my current Neutral overall market sentiment.

As detailed below, a potential return-on-investment result is +1.0% absolute return (equivalent to +32.8% annualized return for the next 11 days) if the XLE equity is assigned early on Friday, Dec. 15th (the last business day prior to the Dec. 18th ex-distribution date); OR +2.0% absolute return (equivalent to +33.4% annualized return over the next 22 days) if the stock is assigned on the December 29th, 2023 options expiration date.

Energy Select Sector SPDR Fund ETF (XLE) -- New Covered Calls Position
The simultaneous buy/write transaction today was as follows:
12/7/2023 Bought 300 Energy Select Sector SPDR Fund ETF shares @ $81.08 per share.
12/7/2022 Sold 3 XLE 12/29/2023 $79.00 Call options @ $2.86 per share.  The Delta for these Calls was 68.4 when this buy/write position was established.

12/18/2023 Upcoming quarterly XLE ex-distribution of $.8021 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: $23,468.01
= ($81.08 - $2.86) * 300 shares + $2.01 commissions

Net Profit Components:
(a) Options Income: +$855.99
= ($2.86 * 300 shares) - $2.01 commissions
(b) Distribution Income (If option exercised on the last business day prior to the Dec. 18th ex-distribution date): +$0.00; or
(b) Distribution Income (If XLE shares assigned at the Dec. 29th, 2023 options expiration): +$240.63
= ($.8021 distribution per share x 300 shares)
(c) Capital Appreciation (If XLE shares assigned early): -$624.00
+($79.00 - $81.08) * 300 shares ;or
(c) Capital Appreciation (If shares are in-the-money and therefore assigned at the $79.00 strike price at options expiration): -$624.00
+($79.00 - $81.08) * 300 shares

1. Total Net Profit [If options exercised on Dec. 18th (last business day prior to the Dec. 19th ex-distribution date)]: +$231.99

= (+$855.99 options income +$0.00 distribution income - $624.00 capital appreciation); or

2. Total Net Profit (If XLE shares assigned at $79.00 strike price at the Dec. 29th, 2023 expiration): +$472.62

= (+$855.99 options income + $240.63 distribution income - $624.00 capital appreciation)

1. Absolute Return-on-Investment [If XLE Call options exercised on final business day prior to ex-distribution date]: +1.0%

= +$231.99/$23,468.01 

Annualized Return-on-Investment (If options exercised early): +32.8%

= (+$231.99/$23,468.01) * (365/11 days); or

2. Absolute Return-on-Investment (If XLE shares assigned at $79.00 strike price on the Dec. 29th, 2023 options expiration date): +2.0%

= +$472.62/$23,468.01

Annualized Return-on-Investment (If XLE shares assigned at $79.00 at the Dec. 29th, 2023 expiration): +33.4%

= (+$472.62/$23,468.01) * (365/22 days)

These returns will be achieved as long as the XLE price is above the $79.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $77.4179 ($81.08 -$2.86 -$.8021) provides 4.5% downside protection below today's purchase price.