A short-term Covered Calls position was established in Wells Fargo & Company (ticker symbol WFC) today when the Covered Calls Advisor's buy/write limit order was executed -- 400 shares were purchased at $50.06 and 4 February 9th, 2024 weekly Call options were sold at $1.34 at the $49.00 strike price. The corresponding extrinsic value (i.e. time value) was $.28 per share
[$1.34 Call options premium - ($50.06 stock purchase price - $49.00
strike price)], all of which will be profit if the stock is assigned (either by early assignment on the day prior to the February 1st ex-dividend date or at the February 9th options expiration date). The Implied Volatility of the Call options was 18.0 which, as desired by the Covered Calls Advisor, is above the current 13.3 of the S&P 500 Volatility Index (i.e. VIX).
At today's purchase price, the upcoming ex-dividend of $.35 has a 2.8% annualized dividend yield. So, this short-term (only 14 days until options expiration) position is established to take advantage of the potential to achieve a satisfactory annualized return-on-investment in a position that meets all nine criteria of the Covered Calls Advisor's Dividend Capture Strategy (see table at end of this post). In addition, Wells Fargo met all 15 criteria in my Financials Sector stock screener.
Most companies in the Financial Sector (such as Wells Fargo) provide only modest growth prospects, but they often provide good annual dividend yields. Consequently, the Covered Calls Advisor targets opportunities to use the Dividend Capture Strategy in all Financial Sector Covered Calls positions. This new Wells Fargo Covered Calls position continues the Covered Calls Advisor's Dividend Capture Strategy of often selling
in-the-money monthly Covered Calls for one of six mega-cap U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo) for each options expiration
month: (JPMorgan Chase quarterly for Jan, Apr, July, and Oct options expirations; Citigroup, Morgan Stanley, and/or Wells Fargo for Feb, May, Aug, and Nov options expirations; and Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec options expirations).
The goal of these monthly Covered Calls in these banks is to both provide an opportunity to either: (1) potentially capture the quarterly dividend payment and if the stock price remains above the strike price at
options expiration, in which case the maximum possible return-on-investment result on the options expiration date for the position would be achieved; or (2) have the stock assigned early on the day prior to the ex-dividend date in which case the Covered Calls Advisor is usually very pleased since the Dividend Capture Strategy criteria are designed such that the annualized return-on-investment for early assignment normally exceeds the Covered Calls Advisor's minimum threshold (as is the case with this Wells Fargo position). So far, applying this approach has provided attractive annualized return results -- better than would be achieved
if Covered Calls positions for these bank stocks were held in the Covered Calls Advisor Portfolio during the other two non-dividend paying months each quarter.
Two potential return-on-investment results for this position are
highlighted below (including the possibility of early assignment since
the ex-dividend is prior to the February 9th options expiration date).
Given the Covered Calls Advisor's current Neutral overall market
sentiment, a slightly in-the-money Covered Calls position was established--the Delta was 71.5 which approximates a probability of 71.5% that the stock will be in-the-money, and therefore assigned (i.e. sold), on the February 9th, 2024 options expiration date.
As detailed below, two potential return-on-investment results are:
- +0.6% absolute return (equivalent to +34.1% annualized
return for the next 6 days) in the relatively unlikely event that the stock is assigned early (business day
prior to the February 1st ex-dividend date); OR
- +1.3%
absolute return (equivalent to +33.3% annualized return over the next 14 days) if the stock is assigned on the February 9th options expiration date.
Wells Fargo & Company (WFC) -- New Covered Calls Position
The buy/write transaction was:
1/26/2024 Bought 400 Wells Fargo shares @ $50.06
1/26/2024 Sold 4 Wells Fargo 2/9/2024 $49.00 Call options @ $1.34
2/1/2024 Upcoming quarterly ex-dividend of $.35 per share
Two possible overall performance results (including commissions) for this Wells Fargo Covered Calls position are as follows:
Covered Calls Net Investment: $19,490.68
= ($50.06 - $1.34) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$533.32
= ($1.34 * 400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on January 31st, the day prior to the Feb. 1st ex-div date): +$0.00;
or
(b) Dividend Income (If Wells Fargo stock assigned at the Feb. 9th, 2024 options on; so the $.35 dividend is captured): +$140.00
= ($.35 dividend per share x 400 shares)
(c) Capital Appreciation (If Wells Fargo Call options assigned early on Feb. 1st, 2024): -$424.00
+($49.00 - $50.06) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $49.00 strike price at options expiration): -$424.00
+($49.00 - $50.06) * 400 shares
1. Total Net Profit [If option exercised on 1/31/2024 (business day prior to the 2/1/2024 ex-dividend date)]: +$109.32
= (+$533.32 options income +$0.00 dividend income -$424.00 capital appreciation); or
2. Total Net Profit (If Wells Fargo shares assigned at $49.00 at the February 9th, 2024 expiration): +$249.32
= (+$533.32 +$140.00 -$424.00)
1. Absolute Return-on-Investment [If option exercised on Aug 3rd (business day prior to ex-dividend date)]: +0.6%
= +$109.32/$19,490.68
Annualized Return-on-Investment (If option exercised early): +34.1%
= (+$109.32/$19,490.68) * (365/6 days); or
2. Absolute Return-on-Investment (If Wells Fargo shares assigned at $49.00 at the 2/1/2024 options expiration): +1.3%
= +$249.32/$19,490.68
Annualized Return-on-Investment (If Wells Fargo shares assigned at $49.00 at the 2/9/2024 expiration): +33.3%
= (+$249.32/$19,490.68) * (365/14 days)
Either
outcome provides a satisfactory return-on-investment result for this
Wells Fargo investment. These returns will be achieved as long as the stock is
above the $49.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $48.37 ($50.06 -$1.34 -$.35)
provides a 3.4% 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 must be 'YES' prior to establishing a position. As shown below with this Wells Fargo position, all nine criteria are met.
