Today, a covered calls position was established in Foot Locker Inc. (ticker symbol FL) with a July 21, 2017 expiration and at the $48.00 strike price. This position has an upcoming quarterly ex-dividend on July 12th of $.31 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the July 21st options expiration date. Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established. A Covered Calls positions was preferable to its comparable short Put options position in this instance since the maximum potential income of $.71 ($.31 ex-div plus $.40 time value) for the Covered Calls was $.04 per share greater than the $.67 that was then available for selling 100% cash-secured Put options.
As detailed below, a potential return-on-investment result is +0.75% absolute return (equivalent to +54.9% annualized
return for the next 5 days) if the stock is assigned early (business day
prior to July 12th ex-date); OR +1.4%
absolute return (equivalent to +33.5% annualized return over the next 15
days) in the much more likely event that the stock is assigned on the July 21, 2017 options expiration date.
Foot Locker Inc. (FL) -- New Covered Calls Position
An ex-dividend occurs on July 12th for $.31. If the
current time value (i.e. extrinsic value) of $.40 [$2.12 option premium -
($49.72 stock price - $48.00 strike price)] remaining in the short call
options decays substantially (down to about $.10 or less) by July 11th (the business day prior to the ex-dividend date), there is
a possibility that the Call options owner would exercise early and
therefore call the 500 Foot Locker shares away to capture the dividend payment.
The transactions were:
07/07/2017 Bought 500 FL shares @ $49.72
07/07/2017 Sold 5 FL July 21,2017 $48.00 Call options @ $2.12
Note: a simultaneous buy/write transaction was executed.
07/12/2017 Upcoming quarterly ex-dividend of $.31 per share
Two possible overall performance results (including commissions) for this Foot Locker covered calls position are as follows:
Stock Purchase Cost: $24,864.95
= ($49.72*500+$4.95 commission)
Net Profit:
(a) Options Income: +$1,051.80
= ($2.12*500 shares) - $8.20 commissions
(b) Dividend Income (If option exercised early on July 11th, the business day prior to July 12th ex-div date): +$0.00;
or
(b) Dividend Income (If FL assigned at July 21st, 2017 expiration): +$155.00
= ($.31 dividend per share x 500 shares)
(c) Capital Appreciation (If FL assigned early on July 11th): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions; or
(c) Capital Appreciation (If FL assigned at $48.00 strike price at July 21st options expiration): -$864.95
+($48.00-$49.72)*500 - $4.95 commissions
1. Total Net Profit [If option exercised on July 11th (business day prior to July 12th ex-dividend date)]: +$186.85
= (+$1,051.80 +$0.00 -$864.95); or
2. Total Net Profit (If FL assigned at $48.00 at July 21st expiration): +$341.85
= (+$1,051.80 +$155.00 -$864.95)
1. Absolute Return (If option exercised on business day prior to ex-dividend date): +0.75%
= +$186.85/$24,864.95
Annualized Return (If option exercised early): +54.9%
= (+$186.85/$24,864.95)*(365/5 days); or
2. Absolute Return (If FL assigned at $48.00 at July 21, 2017 expiration): +1.4%
= +$341.85/$24,864.95
Annualized Return (If FL assigned at $48.00 at July 21st expiration): +33.5%
= (+$341.85/$24,864.95)*(365/15 days)
Either
outcome provides an excellent return-on-investment result for this
investment. These returns will be achieved as long as the stock is
above the $48.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $47.29 ($49.72 -$2.12 -$.31)
provides 4.9% downside protection below today's purchase
price.
The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy. The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved. As shown in the table below, all eleven criteria are achieved for this Foot Locker Inc. position.
06/29/2017 Sold 2 BABA 100% cash-secured $135.00 Put options with July 21, 2017 expirations @ $2.56
