A July 29th, 2022 Covered Calls buy/write limit order was placed in Lowe's Companies Inc. (ticker LOW) at a net debit limit price of $168.52 per share. The order was executed by purchasing 200 shares at $180.44 and simultaneously selling two July 29th Call options at the $170.00 strike price for $11.92 per share. The Implied Volatility of these Call options was 33.0 when this transaction was executed which, as preferred by the Covered Calls Advisor, is above the current 27.4 of the S&P 500 Volatility Index (VIX). In addition, there is an upcoming quarterly ex-dividend of $1.05 per share (2.3% annual dividend yield) one week from today on July 19th which is included in the potential return-on-investment calculations detailed below. When this in-the-money Covered Calls position was established today it had a probability of assignment on the options expiration date of 78.9%.
Lowe's meets the five primary criteria currently preferred for new positions established by the Covered Calls Advisor:
As detailed below, two potential return-on-investment results are:
- +0.9% absolute return (equivalent to +45.6% annualized
return for the next 7 days) if the stock is assigned early (business day
prior to the July 19th, 2022 ex-dividend date); OR
- +1.5%
absolute return (equivalent to +30.4% annualized return over the next 18
days) if the stock is assigned on the July 29th, 2022 options expiration date.
These returns will be achieved as long as the Lowe's stock price is
above the $170.00 strike price at options expiration. If the stock declines
below the strike price, the breakeven price of $167.47 per share ($180.44 stock purchase price - $11.92 Call options selling price - $1.05 ex-dividend amount)
provides a substantial 7.2% downside breakeven protection below today's stock purchase
price.
Lowe's Companies Inc. (LOW) -- New Covered Calls Position
If the stock price increases to the point where the
current time value (i.e. extrinsic value) of $1.48 remaining in the short Call
options decays substantially (down to about $.15 or less) by July 18th, 2022 (the last business day prior to the ex-dividend date), there is
a possibility that the Call options owner would exercise early and
therefore call the 200 Lowe's shares away to capture the dividend payment. As detailed in the Dividend Capture spreadsheet below, early assignment would be a very desirable outcome since its +45.6% annualized return-on-investment (aroi) exceeds the +30.4% aroi that would be achieved if the assignment was instead at the July 29th options expiration date.
The simultaneous buy/write transaction was:
7/12/2022 Bought 200 Lowe's shares @ $180.44
7/12/2022 Sold 2 Lowe's July 29th, 2022 $170.00 Call options @ $11.92 per share
7/19/2022 Upcoming quarterly ex-dividend at $1.05 per share
Two possible overall performance results (including commissions) for this Lowe's Companies Covered Calls position are as follows:
Stock Purchase Cost Basis: $33,702.66
= ($180.44 - $11.92) *200 shares + $1.34 commission
Net Profit:
(a) Options Income: +$2,382.66
= ($11.92 *200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on July 18th, the business day prior to the July 19th ex-div date): +$0.00;
or
(b) Dividend Income (If Lowe's shares assigned at the July 29th, 2022 expiration): +$210.00
= ($1.05 dividend per share x 200 shares)
(c) Capital Appreciation (If Lowe's stock assigned early): -$2,088.00
+($170.00 -$180.44) * 200 shares; or
(c) Capital Appreciation (If Lowe's assigned at $170.00 strike price at expiration): -$2,088.00
+($170.00-$180.44) * 200 shares
1. Total Net Profit [If option exercised on the last business day prior to the July 19th ex-dividend date)]: +$294.66
= (+$2,382.66 options income +$0.00 dividend income -$2,088.00 capital appreciation); or
2. Total Net Profit (If Lowe's assigned at $170.00 at July 29th, 2022 expiration): +$504.66
= (+$2,382.66 options income +$210.00 dividend income -$2,088.00 capital appreciation)
1. Absolute Return-on-Investment (If option exercised on business day prior to ex-dividend date): +0.9%
= +$294.66/$33,702.66
Annualized Return-on-Investment (If option exercised early): +45.6%
= (+$294.66/$33,702.66) * (365/7 days); or
2. Absolute Return-on-Investment (If Lowe's assigned at $170.00 at July 29th expiration date): +1.5%
= +$504.66/$33,702.66
Annualized Return-on-Investment (If Lowe's shares assigned at $170.00 at July 29th, 2022 options expiration): +30.4%
= (+$504.66/$33,702.66) *(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, all nine criteria are achieved in this Lowe's Companies Inc. position.
