This position uses the Covered Calls Advisor's Dividend Capture Strategy since Lowe's has an upcoming quarterly ex-dividend of $.80 per share on July 20th, 2021 which is prior to the July 30th options expiration date. This is equivalent to an absolute annualized dividend yield of 1.7% (at the $191.44 stock price) and an equivalent annualized dividend yield of 6.6% = [($.80/$191.44) x (365/23 days to expiration)]. This dividend is included in the detailed return-on-investment calculations below. Either an early assignment on the day prior to the ex-dividend date or on the July 30th 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 Q2 earnings will be reported on August 18th, 2021.
Lowe's is in the top 4% of large-cap (>$10B market cap) companies based on the metrics in the Covered Calls Advisor's "Large-Cap Value, Profitability, and Growth" screener. It is also highly rated by the 32 analysts' that cover it. They have an average target price of $228.75 (+19.5% above the current price) with 25 of the 32 analysts rating it as 'Buy' or 'Market Outperform', 7 rate it a 'Hold', and no analyst rates it as a 'Market Underperform' or 'Sell'.
As shown on the table at the bottom of this post, all nine criteria of
the Dividend Capture Strategy are met
with this position. The Covered Calls Advisor's current Overall Market Meter outlook remains cautious, so the appropriate Covered Calls strategy is to sell in-the-money strike prices. Even if the stock market declines somewhat during the next 23 days, hopefully the decline will be a moderate one and the stock price of Lowe's will not decline below the $187.50 strike price at closing on the July 30th options expiration date. The Delta for these Call options was 66.2 when this position was established which approximates the probability that the position will be in-the-money at market close on the options expiration date.
As detailed below, two potential return-on-investment results are:
- +1.2% absolute return (equivalent to +35.8% annualized
return for the next 12 days) if the stock is assigned early (business day
prior to the July 20th ex-dividend date).
- +1.6% absolute return (equivalent to +25.5% annualized return over the next 23 days) if the stock is assigned on the July 30th, 2021 options expiration date.
Lowe's Companies Inc. (LOW) -- New Covered Calls Position
The buy/write transaction was:
07/08/2021 Bought 200 Lowes Companies Inc. shares @ $191.44
07/08/2021 Sold 2 Lowes 07/30/2021 $187.50 Call options @ $6.12
Note: Implied Volatility (IV) of the Call options was at 20.5 when this position was transacted.
07/20/2021 Upcoming quarterly ex-dividend of $.80 per share
Two possible overall performance results (including commissions) for this Lowes Companies Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $37,065.34
= ($191.44 - $6.12) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,224.00
= ($6.12 * 200 shares)
(b) Dividend Income (If option exercised early on July 19th, 2021, the business day prior to the July 20th ex-div date): +$0.00; or
(b) Dividend Income (If Lowe's stock assigned at July 30th, 2021 options expiration): +$160.00
= ($.80 dividend per share x 200 shares)
+($187.50 - $191.44) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $187.50 strike price at options expiration): -$788.00
+($187.50 - $191.44) * 200 shares
Either outcome provides an attractive return-on-investment result for this Lowe's Companies Inc. investment. These returns will be achieved as long as the stock is above the $187.50 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $184.52 ($191.44 -$6.12 -$.80) provides 3.6% 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 (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 Lowe's Companies Inc. Covered Calls position.
