This afternoon my buy/write limit order was executed in Yum China Holdings Inc. (ticker YUMC) to buy 1,000 shares and simultaneously sell 10 Call options at the September 20th, 2024 monthly options expiration date and at the $32.50 strike price. The net debit limit price for my order was $31.60 which was executed when 1,000 shares were purchased at $33.35 and 10 September 20th, 2024 Call options were sold for $1.75 per share. Therefore, a maximum potential time value profit of $.90 per share = [$1.75 options premium - ($33.35 stock price - $32.50 strike price)] is available for this position.
This position uses the Covered Calls Advisor's Dividend Capture Strategy since Yum China has an upcoming quarterly ex-dividend of $.16 per share (a 1.9% annual dividend yield) on August 27th which is prior to the September 20th options expiration date. This is equivalent to an annualized dividend yield of 5.0% = [($.16/$33.35) x (365/35 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 on the last trading day prior to the August 27th ex-dividend date or on the September 20th 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 October 29th, 2024 is after the Sept 20th options expiration date.
As shown on the table at the bottom of this post, all nine criteria of my Dividend Capture Strategy are met with this position. Even if this Yum China stock price declines somewhat during the next 35 days until the options expiration date, if the stock closes above the $32.50 strike price, then a satisfactory annualized-return-on-investment of +34.8% will be achieved. The probability that this position will be in-the-money and therefore assigned on the options expiration date was 60.8% when this position was established today.
According to LSEG (Refinitiv), there are 27 Wall Street analysts covering Yum China and their average Target Price is $44.92 which is +34.7% above today's purchase price. As shown in the image below, Yum China meets all 19 filters in my GARP (Growth at a Reasonable Price) stock screener. Another reason for establishing this position was that Yum China also meets all filters in my Large-Cap Value+Profitability+Growth stock screener.
As detailed below, two potential return-on-investment results are:
- +2.8% absolute return-on-investment (equivalent to +93.8% annualized
return-on-investment for the next 11days) if the stock is assigned early (on the last business day
prior to the August 27th ex-dividend date); or
- +3.3% absolute return-on-investment (equivalent to +34.8% annualized return-on-investment over the next 35 days) if the stock is assigned on the September 20th, 2024 options expiration date.
Yum China Holdings Inc. (YUMC) -- New Covered Calls Position
The buy/write transaction was:
8/16/2024 Bought 1,000 Yum China shares @ $33.35.
8/16/2024 Sold 10 Yum China 9/20/2024 $32.50 Call options @ $1.75 per share. The Implied Volatility of these Calls was 28.9 when this position was established which, as I prefer, is well above the current 14.9 of the S&P 500 Volatility Index (i.e. VIX).
8/27/2024 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: $31,606.70
= ($33.35 - $1.75) * 1,000 shares + $6.70 commission
Net Profit Components:
(a) Options Income: +$1,743.30
= ($1.75 * 1,000 shares) - $6.70 commission
(b) Dividend Income (If Yum China Call options exercised early on the last business day prior to the August 27th ex-div date): +$0.00; or
(b) Dividend Income (If YUMC stock assigned at the Sept 20th, 2024 options expiration date): +$160.00
= ($.16 dividend per share x 1,000 shares)
(c) Capital Appreciation (If YUMC's Call options assigned early on Aug. 27th): -$850.00
+($32.50 strike price - $33.35 stock purchase price) * 1,000 shares; or
(c) Capital Appreciation (If shares assigned at $32.50 strike price at the September 20th options expiration): -$850.00
+($32.50 - $33.35) * 1,000 shares
1. Total Net Profit [If option exercised early (last business day prior to the August 27th ex-dividend date)]: +$893.30
= (+$1,743.30 options income +$0.00 dividend income -$850.00 capital appreciation); or
2. Total Net Profit (If YUMC's shares assigned at $32.50 at the Sept 20th, 2024 expiration): +$1,053.30
= (+$1,743.30 options income +$160.00 dividend income -$850.00 capital appreciation)
1. Potential Absolute Return-on-Investment [If option exercised on business day prior to the 8/27/2024 ex-dividend date]: +2.8%
= +$893.30/$31,606.70
Potential Annualized Return-on-Investment (If option exercised early): +93.8%
= (+$893.30/$31,606.70) * (365/11 days); or
2. Potential Absolute Return-on-Investment (If Yum China's shares assigned on the September 20th options expiration date): +3.3%
= +$1,053.30/$31,606.70
Potential Annualized Return-on-Investment (If shares are assigned at $32.50 at the Sept 20th, 2024 options expiration date): +34.8%
= (+$1,053.30/$31,606.70) * (365/35 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, all nine criteria are achieved for this Yum China Holdings Inc. Covered Calls position.
