This position uses the Covered Calls Advisor's Dividend Capture Strategy since Yum China has an upcoming quarterly ex-dividend of $.16 per share (a 1.5% annual dividend yield) on Monday March 4th which is prior to the March 15th options expiration date. This is equivalent to an annualized dividend yield of 7.7% = [($.16/$42.01) x (365/18 days to expiration)]. I am encouraged by the increase in their quarterly dividend from $.13 last year to $.16 now (a 23% increase). This dividend is included in the detailed return-on-investment calculations below. Either an early assignment this Friday, March 1st (the last trading day prior to next Monday's March 4th ex-dividend date) or on the March 15th options expiration date would be desirable to the Covered Calls Advisor given the potential annualized return on investments for either outcome. Importantly to the Covered Calls Advisor, there is no quarterly earnings report prior to the options expiration date since the next earnings report on April 30th, 2024 is after the March 15th options expiration date.
As shown on the table at the bottom of this post, eight of the nine criteria of the Dividend Capture Strategy are met with this position. Even if this Yum China stock price declines somewhat during the next 18 days until the options expiration date, if the stock closes above the $40.00 strike price, then a satisfactory annualized-return-on-investment of +29.4% will be achieved. The Delta for these Call options was approximately 75.7 when this position was established which approximates the probability of 75.7% that the position will be in-the-money at market close on the options expiration date. I also have a positive impression since like many of the quick service restaurant companies, Yum China has a relatively low Beta (3-year) of 0.77.
As shown on the table at the bottom of this post, eight of the nine criteria of the Dividend Capture Strategy are met with this position. Even if this Yum China stock price declines somewhat during the next 18 days until the options expiration date, if the stock closes above the $40.00 strike price, then a satisfactory annualized-return-on-investment of +29.4% will be achieved. The Delta for these Call options was approximately 75.7 when this position was established which approximates the probability of 75.7% that the position will be in-the-money at market close on the options expiration date. I also have a positive impression since like many of the quick service restaurant companies, Yum China has a relatively low Beta (3-year) of 0.77.
According to LSEG (Refinitiv), there are 27 Wall Street analysts covering Yum China and their average Target Price is $57.80 which is +37.6% above today's purchase price. Another reason for establishing this position was that Yum China is highly ranked in my Quality +Value +Growth stock screener since 17 of the 18 filters in that screener are currently achieved (see chart below). I am not overly concerned about the -2.9% current quarter eps growth estimate given the very positive trailing twelve months eps results as well as analysts' forecasts for an average next year eps growth estimate is at +13.6%.
As detailed below, two potential return-on-investment results are:
- +1.0% absolute return-on-investment (equivalent to +54.4% annualized
return-on-investment for the next 7 days) if the stock is assigned early (on the last business day
prior to the March 4th ex-dividend date); or
- +1.4% absolute return-on-investment (equivalent to +29.4% annualized return-on-investment over the next 18 days) if the stock is assigned on the March 15th, 2024 options expiration date.
The buy/write transaction was:
2/26/2024 Bought 500 Yum China shares @ $42.01.
2/26/2024 Sold 5 Yum China 3/15/2024 $40.00 Call options @ $2.43 per share. The Implied Volatility of these Calls was 26.2 when this position was established which, as I prefer, is well above the current 13.8 of the S&P 500 Volatility Index (i.e. VIX).
3/4/2024 Upcoming quarterly ex-dividend of $.16 per share.
Two possible overall performance results (including commissions) for this Yum China Holdings Inc. Covered Calls position are as follows:
Covered Calls Net Investment: $19,793.35
= ($42.01 - $2.43) * 500 shares + $3.35 commission
Net Profit Components:
(a) Options Income: +$1,211.65
= ($2.43 * 500 shares) - $3.35 commission
(b) Dividend Income (If Yum China Call options exercised early on March 1st, 2024, the last business day prior to the March 4th ex-div date): +$0.00; or
(b) Dividend Income (If YUMC stock assigned at the March 15th, 2024 options expiration date): +$80.00
= ($.16 dividend per share x 500 shares)
(c) Capital Appreciation (If YUMC's Call options assigned early on March 1st): -$1,005.00
+($40.00 strike price - $42.01 stock purchase price) * 500 shares; or(c) Capital Appreciation (If shares assigned at $40.00 strike price at the March 15th options expiration): -$1,005.00
+($40.00 - $42.01) * 500 shares
1. Total Net Profit [If option exercised early (business day prior to the March 4th ex-dividend date)]: +$206.65
= (+$1,211.65 options income +$0.00 dividend income -$1,005.00 capital appreciation); or
2. Total Net Profit (If YUMC's shares assigned at $40.00 at the March 15th, 2024 expiration): +$286.65
= (+$1,211.65 options income +$80.00 dividend income -$1,005.00 capital appreciation)
1. Potential Absolute Return-on-Investment [If option exercised on business day prior to the 3/4/2024 ex-dividend date]: +1.0%
= +$206.65/$19,793.35
Potential Annualized Return-on-Investment (If option exercised early): +54.4%
= (+$206.65/$19,793.35) * (365/7 days); or
2. Potential Absolute Return-on-Investment (If Yum China's shares assigned on the March 15th options expiration date): +1.4%
= +$286.65/$19,793.35
Potential Annualized Return-on-Investment (If shares are assigned at $40.00 at the March 15th, 2024 options expiration date): +29.4%
= (+$286.65/$19,793.35) * (365/18 days)
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. As shown below, eight of the nine criteria are achieved for this Yum China Holdings Inc. Covered Calls position.
