Established Covered Calls in Merck & Co. Inc. Using Dividend Capture Strategy

Today, a Covered Call position was established in Merck & Co. Inc. (ticker MRK) with the purchase of 200 shares at $72.24 per share and two March 26th, 2021 Call options were sold for $2.84 per share at the $70.00 strike price.  A moderately in-the-money Covered Calls positions was established with the Delta of the Calls at 71.0 when this buy/write transaction was executed, which approximates the probability of assignment on the March 26th, 2021 options expiration date.  Merck goes ex-dividend at $.65 per share (3.6% dividend yield at the current stock price) on March 12th which is prior to the March 26th options expiration date, so this dividend is included in the potential return-on-investment results shown below.  All nine criteria in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet were met for this position and there is no quarterly earnings report prior to the options expiration date. 

Two potential return-on-investment results are: (a) +0.9% absolute return (equivalent to +39.4% annualized return for the next 8 days) if the stock is assigned early (on the last trading day prior to the March 12th, 2021 ex-dividend date); OR (b) +1.8% absolute return (equivalent to +28.6% annualized return over the next 23 days) if the stock is assigned on the March 26th options expiration date. 

Merck & Co. Inc. (MRK) -- New Covered Calls Position

The simultaneous buy/write transaction was as follows:
03/04/2021 Bought 200 shares of Merck & Co. stock @ $72.24 per share 
03/04/2021 Sold 2 MRK March 26th, 2021 $70.00 Call options @ $2.84 per share
Note: The Open Interest in these Calls was 334 contracts and the Implied Volatility was 20.0 when this buy/write transaction executed.
03/12/2021 Upcoming ex-dividend of $.65 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Call Cost Basis: $13,881.34
= ($72.24 - $2.84) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$568.00
= ($2.84 * 200 shares)
(b) Dividend Income (If Merck shares assigned on 3/11/2021, the business day prior to the 3/12/2021 ex-dividend date): = +$0.00; or
(b) Dividend Income (If Merck shares assigned at 3/26/2021 options expiration): +$130.00
= $.65 per share x 200 shares
(c) Capital Appreciation (If MRK shares assigned early on 3/11/2021): -$448.00
= ($70.00 -$72.24) * 200 shares; or
(c) Capital Appreciation (If MRK shares assigned with stock above $70.00 strike price at March 26th options expiration): -$448.00
= ($70.00 -$72.24) * 200 shares

1. Potential Net Profit (If Merck shares assigned on 3/11/2021, the day prior to the March 12th ex-dividend date): +$120.00
= (+$568.00 options income +$0.00 dividend income - $448.00 capital appreciation)
2. Potential Net Profit (If MRK price is above $70.00 strike price at March 26th options expiration): +$250.00
= (+$568.00 options income +$130.00 dividend income - $448.00 capital appreciation)

1. Absolute Return (If Merck shares assigned early on 3/11/2021, the day prior to the March 12th ex-dividend date): +0.9%
= +$120.00/$13,388.34
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +39.4%
= (+$120.00/$13,388.34)*(365/8 days)
2. Absolute Return (If Merck price is above $70.00 strike price at March 26th options expiration): +1.8%
= +$250.00/$13,881.34
Equivalent Annualized Return (If assigned on 3/26/2021 options expiration date): +28.6%
= (+$250.00/$13,881.34)*(365/23 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 Merck & Co. Inc. Covered Call position.

Early Assignment of Bank of America Corp. and Rio Tinto PLC Covered Calls

Early this morning, the Covered Calls Advisor received notification from my broker (Schwab) that two Covered Calls positions [Bank of America Corp. (BAC) and Rio Tinto PLC (RIO)] were exercised early by the Call option owners.  

The Bank of America position was a partial early assignment since 7 of the 10 Covered Calls were assigned -- and 3 Covered Calls remain in the Covered Calls Advisor Portfolio.  I was pleased but also somewhat surprised by the early assignment:
(1) "Pleased" because the annualized return-on-investment (aroi) for the early assignment of +57.8% is much greater than the +36.1% aroi if the Covered Calls would have remained in-the-money at their March 12th, 2021 options expiration date and instead have been assigned then.
(2) "Somewhat Surprised" because the Call owners chose to immediately forgo the remaining time of $.09 per share [$2.51 midpoint of the Call options' $2.38/$2.64 bid/ask spread - ($36.42 stock price - $34.00 strike price)] with only 7 trading days remaining until the options expiration.

Early Assignment of the two Rio Tinto Covered Calls was expected since there was a large ex-dividend today and virtually no time value remaining in the Calls.  Yesterday afternoon, I looked at potentially rolling out the Calls in order to capture the dividend, but decided the opportunities available were not sufficiently attractive; so the decision was made to allow for the early assignment, take the profit, and now look to move on to a new position in a different company. 

As detailed below, the return-on-investment results were as follows:

• Bank of America Inc. -- +0.9% absolute return (equivalent to +57.8% annualized return-on-investment for the 6 days this position was held); and 
• Rio Tinto PLC -- +1.1% absolute return (equivalent to +27.5% annualized roi for the 14 days this position was held)
  
  

1. Bank of America Corp. (BAC) -- Covered Calls Position Closed by Early Assignment

The buy/write transaction was as follows:
02/26/2021 Bought 1,000 shares of Bank of America Corp. stock @ $35.48 per share 
02/26/2021 Sold 10 BAC March 12th, 2021 $34.00 Call options @ $1.80 per share
Note: The Open Interest in these Calls was 850 contracts and the Implied Volatility was 30.6
03/04/2021 Seven BAC March 12th, 2021 Call options exercised early so the Calls expired worthless and 700 shares of BAC stock was sold at the $34.00 strike price.
Note: 3 Covered Calls remain in the Covered Calls Advisor Portfolio

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $23,580.69
= ($35.48 - $1.80) * 700 shares + $4.69 commission

Net Profit Components:
(a) Options Income: +$1,260.00
= ($1.80 * 700 shares)
(b) Dividend Income (700 BAC shares assigned on 3/3/2021, the business day prior to the 3/4/2021 ex-dividend date): = +$0.00
(c) Capital Appreciation (BAC shares assigned early): -$1,036.00
= ($34.00 -$35.48) * 700 shares

Net Profit (700 Bank of America shares assigned on 3/3/2021, the day prior to the March 4th ex-dividend date): +$224.00
= (+$1,260.00 options income +$0.00 dividend income - $1,036.00 capital appreciation)

Absolute Return: +0.9%
= +$224.00/$23,580.69
Equivalent Annualized Return (If assigned early on day prior to ex-div date): +57.8%
= (+$224.00/$23,580.69)*(365/6 days) 

 

2. Rio Tinto PLC (RIO) -- Covered Calls Position Closed by Early Assignment

The buy/write transaction was:
02/18/2021 Bought 200 Rio Tinto shares @ $87.38
02/18/2021 Sold 2 RIO 3/19/2021 $82.50 Call options @ $5.74
Note: the Implied Volatility of the Call options was 26.8 when this transaction was executed.
03/04/2021 Two RIO March 19th, 2021 $82.50 Call options exercised early, so the 200 shares of RIO were sold at the $82.50 strike price.

The overall performance results (including commissions) for this Rio Tinto Covered Calls position are as follows:
Covered Calls Cost Basis: $16,329.34
= ($87.38 - $5.74) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$1,148.00
= ($5.74 * 200 shares)
(b) Dividend Income (Both options exercised early on March 3rd, the business day prior to the March 4th ex-div date): +$0.00

(c) Capital Appreciation (RIO Call options assigned early on March 3rd): -$976.00
= +($82.50 - $87.38) * 200 shares

 Total Net Profit [RIO Call options exercised on March 3rd (business day prior to March 4th ex-dividend date)]: +$172.00

= (+$1,148.00 options income +$0.00 dividend income -$976.00 capital appreciation)

 

Absolute Return: +1.1%

= +$172.00/$16,329.34

Annualized Return (If options exercised early): +27.5%

= (+$172.00/$16,329.34)*(365/14 days)

Established Covered Calls in Uber Technologies Inc.

This afternoon a new Covered Calls position was established in Uber Technologies Inc. (ticker UBER) with a March 19th, 2021 options expiration date.   A buy/write transaction entered at a net debit of $50.20 was executed by purchasing 300 shares of Uber at $54.99 and simultaneously selling three March 19th, 2021 Call options at the $51.00 strike price at $4.79 per share. The time value when this Covered Calls position was established was $.80 per share = [$4.79 Call options price - ($54.99 stock price - $51.00 strike price)].  Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established.  The Delta was 77.6 which approximates a probability of 77.6% that the Call options will be in-the-money and therefore the stock assigned (i.e. sold) on the options expiration date. The Implied Volatility of these Calls was 46.6 today when this transaction was executed.

The Covered Calls Advisor self imposes a limitation of no more than one position at a time in a speculative company.  Most recently, the Covered Calls position in DraftKings was the sole speculative position and it expired in-the-money at the February 6th, 2021 options expiration for a nice profit.  Uber is the leading ride-sharing company in the U.S. and the now rapidly accelerating pace of Covid vaccine administration portends an accompanying acceleration in Uber's business (which is likely now experiencing a rapid inflection to substantial revenue growth this year (likely 40%+ in 2021 versus 2020).  As a speculative company, Uber was selected for the Covered Calls Advisor Portfolio primarily because it was one of only a few companies identified by a stock screener of highly rated companies by three of the Covered Calls Advisor's favored rating services (CFRA, Morningstar, and Reuters Research).  In addition, of 39 analysts' covering Uber, their average target price is $68.34 (24.3% above the stock purchase price and 34% above the $51.00 strike price).   

The Covered Calls Advisor also prefers to maintain a reasonable amount of Sector diversification.  Since the Raytheon Covered Calls position was closed by early assignment on February 25th, there has been no position in the Industrials sector in the Covered Calls Advisor Portfolio.  Although Uber would seem to straddle three different sectors (Consumer Discretionary, Information Technology, and Industrial), Schwab categorizes it as an Industrial (in that sector's Road & Rail industry); so this Uber position now fills the void in the Industrial sector in the Covered Calls Advisor Portfolio. 

As detailed below, the potential return-on-investment result is +1.6% absolute return in 18 days (equivalent to a +32.3% annualized return-on-investment).  

Uber Technologies Inc. (UBER) -- New Covered Calls Position

The simultaneous Buy/Write transaction was as follows:
03/02/2021 Bought 300 Uber shares @ $54.99 per share 
03/02/2021 Sold 3 Uber March 19th, 2021 $51.00 Call options @ $4.79 per share

A possible overall performance result (including commissions) if the stock price is above the $51.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $15,062.01
= ($54.99 - $4.79) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$1,437.00
= ($4.79 * 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If Uber stock is above $51.00 strike price at the March 19th, 2021 options expiration): -$1,197.00
= ($51.00 - $54.99) * 300 shares

Total Net Profit: +$240.00
= (+$1,437.00 options income +$0.00 dividend income -$1,197.00 capital appreciation)

Absolute Return: +1.6%
= +$240.00/$15,062.01
Equivalent Annualized Return: +32.3%
= (+$240.00/$15,062.01)*(365/18 days)

The downside 'breakeven price' at expiration is at $50.20 ($54.99 - $4.79), which is 8.7% below the current market price of $54.99.

Recommended Reading -- #2

Recommended Reading #1 article on this blog (link) described how we should strive to be "Avid, Selective, Careful, Critical, and Thoughtful (ASCCT) readers in our investing-related reading.  But  (1) How do we identify articles that are worthwhile reading?; and (2) Can these articles be organized in a way that makes it easy for us to find them?  This article briefly describes how I do this and I'm hopeful you will find this information useful and will consider doing something similar.

In recent years, I have found many blogs that provide excellent investing-related information.  Initially, I would simply bookmark the link to any blogger whose articles I wanted to regularly follow.  But as the number of bloggers grew, it eventually became too unwieldy.  Fortunately, I learned that there are services called RSS reader apps that can organize many blogs in a very user-friendly format.  Also fortunately, several of these apps have free platforms that provide adequate features.  I chose Netvibes a few years ago and am very satisfied with it.  Among others for you to consider would include Feedly, Inoreader, and Feed Reader.

A screen shot from my Netvibes reader feed is shown below.  I have a tab for each category of blogs I follow -- my categories are Covered Calls, Investing, Value Investing, Economics, Stocks, Dividend Stocks, Podcasts, and Personal Finance/Retirement.  Under each category there are a few blogs that I follow.  The image below shows six blogs in the Investing category: Abnormal Returns, A Wealth of Common Sense, etc.; and for each blog there are links to the titles of their seven most recent articles.  As you can see, this makes it easy to scan the titles and to click on any article that I want to open for viewing and reading. 

 

Click on the image above for a larger view.

If you want to try this (and I hope you will), first do some basic research on a few RSS reader apps and select one whose features most appeal to you.  Then establish a few categories and add at least one blog to each category.  You can add, delete, or change categories at any time you want to as you continue to develop and customize your own reader feeds.  You can also add, delete, or change the individual blogs in your reader feed at any time.  You can also re-arrange the position of your individual blogs:  (1) their location on the page; and (2) even move then from one category to another more appropriate category.   

To aid you in getting started, you might consider including some of my favorites in each of four categories, which are:
1. Covered Calls -- Covered Calls Advisor (of course) http://coveredcallsadvisor.blogspot.com/ and The Blue Collar Investor https://www.thebluecollarinvestor.com/blog/
2. Investing -- Abnormal Returns https://abnormalreturns.com/ and A Wealth of Common Sense https://awealthofcommonsense.com/
3. Value Investing -- The Acquirer's Multiple https://acquirersmultiple.com/blog/
4. Economics -- Advisor Perspectives https://www.advisorperspectives.com/dshort?utm_source=dshort_feed&utm_medium=rss&utm_campaign=feed_link 

I hope this information has stimulated your thinking and is helpful to you. Please email me if you have any questions about this article or if there are any investing-related blogs you currently read that you have found to be especially insightful and that you are willing to share with me.  

Best Wishes and Godspeed,

Jeff Partlow
The Covered Calls Advisor
partlow@cox.net