Early Assignment of IBM Corp. Covered Calls

Early this morning, the Covered Calls Advisor was notified by Schwab that the two IBM Corp. February 26th, 2021 $115.00 Call options were exercised early yesterday (on February 8th, 2021), the last business day prior to today's (Feb. 9th) ex-dividend date.   The IBM stock price has increased from its purchase price of $118.15 to $121.98 at the market close yesterday.  So the initial $.84 time value [$3.99 Call options price - ($118.15 stock price - $115.00 strike price)] declined to only $.04 time value remaining at market close yesterday, so the owner of the Calls exercised their right to buy the 200 shares of IBM at the $115.00 strike price and capture today's (February 9th) $1.63 ex-dividend.  

As detailed below, a very attractive +0.7% absolute return in 6 days (equivalent to a +44.8% annualized return-on-investment) was achieved for this position.  The Covered Calls Advisor was pleased with this result since the annualized return of +44.8% that has been achieved exceeded the +32.9% annualized roi that might have been achieved in the future (i.e. Feb. 26th, 2021 options expiration) if the stock price remains above the strike price and therefore the stock would instead be assigned then.

IBM Corp. (IBM) -- Early Assignment of IBM Covered Calls Position
The buy/write transaction was:
02/03/2021 Bought 200 IBM shares @ $118.15
02/03/2021 Sold 2 IBM 2/26/2021 $115.00 Call options @ $3.99
Note: the Bid/Ask spread was $3.90/$4.15 when this transaction was executed.
02/08/2021 Early exercise of 2 IBM Feb. 26th, 2021 $115.00 Call options, so 200 IBM shares were assigned (i.e. sold) at the $115.00 strike price.

The overall performance results (including commissions) for this IBM Covered Calls position are as follows:
Covered Calls Cost Basis: $22,833.34
= ($118.15 - $3.99) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: +$798.00
= ($3.99 * 200 shares)
(b) Dividend Income (Two Call options exercised early on Feb. 8th, the business day prior to the Feb 9th ex-div date): +$0.00
(c) Capital Appreciation (IBM Call options assigned early on Feb 8th): -$630.00
= +($115.00 - $118.15) * 200 shares

 Total Net Profit [Options exercised on Feb 8th (business day prior to Feb 9th ex-dividend date)]: +$168.00

= (+$798.00 options income +$0.00 dividend income -$630.00 capital appreciation)

 

 Absolute Return (Two IBM Call options exercised early on February 8th): +0.7%

= +$168.00/$22,833.34

Annualized Return: +44.8%

= (+$168.00/$22,833.34)*(365/6 days)

Roll Up-and-Out Lennar Corp. Covered Calls

When Lennar Corp. (ticker symbol LEN) shares were trading at $94.85 this afternoon and the existing Covered Calls position was for February 19th, 2021 at the $77.50 strike price, the two Call options were bought-to-close at $17.45 per share.  They were relatively deep-in-the-money and had only $.10 time value remaining, so the Covered Calls Advisor decided to roll-up-and-out to the March 5th, 2021 $85.00 Calls at $10.75 per share.   This remains a conservative in-the-money position since the Delta for these new Calls when this rollout transaction was executed was 83.9 which closely approximates the probability of assignment at options expiration (i.e. 83.9% probability).  The transaction history and potential result detailed below includes the ex-dividend that occurred on January 28th, 2021 of $.25 per share. As preferred by the Covered Calls Advisor, there is no quarterly earnings report for Lennar prior to the March 5th, 2021 options expiration date.

As detailed below, a potential return-on-investment result for this Lennar Corp position is +4.8% absolute return in 52 days (equivalent to a +33.5% annualized return-on-investment) if the stock closes above the $85.00 strike price at the March 5th options expiration.

Lennar Corp. (LEN) -- Continuation of Covered Calls Position
The buy/write transaction was:
01/13/2021 Bought 200 Lennar Corp. shares @ $76.39
01/13/2021 Sold 2 LEN 01/29/2021 $72.50 Call options @ $4.96
Note: the Implied Volatility of the Call options was 37.5 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 73.3.
01/20/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 LEN Jan. 29th, 2021 $72.50 Call options at $11.18 per share and simultaneously Sold-to-Open 2 LEN February 19th, 2021 $77.50 Calls at $7.50 per share. This roll-up-and-out transaction occurred at a net debit of $3.68 ($11.18 - $7.50) per share and the price of Lennar's stock was $83.58 when this transaction was executed.
01/28/2021 Quarterly ex-dividend of $.25 per share
02/08/2021 Roll-Up-and-Out transaction: Bought-to-Close 2 LEN Feb. 19th, 2021 $77.50 Call options at $17.45 per share and simultaneously Sold-to-Open 2 LEN March 5th, 2021 $85.00 Calls at $10.75 per share. This roll-up-and-out transaction occurred at a net debit of $6.70 ($10.75 - $17.45) per share and the price of Lennar's stock was $94.85 when this transaction was executed.

A potential overall performance result (including commissions) for this Lennar Corp. Covered Calls position is as follows:
Covered Calls Cost Basis: $14,287.34
= ($76.39 - $4.96) * 200 shares + $1.34 commission

Net Profit Components:
(a) Options Income: -$1,089.36
= ($4.96 -$11.18 + $7.50 -$17.45 +$10.75) * 200 shares - $5.36 commissions
(b) Dividend Income (If Lennar stock assigned at the March 5th, 2021 options expiration): +$50.00
= ($.25 dividend per share x 200 shares)

(c) Capital Appreciation (If shares assigned at $85.00 strike price at options expiration): +1,722.00
+($85.00 - $76.39) * 200 shares

Total Net Profit (If Lennar shares assigned at $85.00 at March 5th, 2021 expiration): +$682.64

= (-$1,089.36 +$50.00 +$1,722.00)

Absolute Return (If Lennar shares assigned on March 5th options expiration date): +4.8%

= +$682.64/$14,287.34

Annualized Return-on-Investment: +33.5%

= (+$682.64/$14,287.34)*(365/52 days)

Covered Calls Position Established in WestRock Company

A short-term Covered Calls position in WestRock Company (ticker WRK) was established with a February 19th, 2021 options expiration date.  Four hundred shares of WestRock were purchased at $42.79 and four Call options were sold at $3.02 per share at the $40.00 strike price. A deep in-the-money strike price was selected with a Delta (a good approximation of the probability of assignment at expiration) of 82.3.  Importantly, there is no intervening earnings prior to the options expiration date as WestRock's 4th Qtr 2020 earnings were reported on January 28th, 2021.

WestRock is benefiting from a leadership position in a favorable market -- the fiber-based packaging industry that serves both manufacturers' production packaging as well as retailers packing needs for their rapidly growing ecommerce businesses.  WestRock's stock market valuation is also attractive, trading at only 6.0x 2021 estimated EV/EBITDA versus the prior 5-year average of 7.2x.  Also, the average target price reported by Reuters Research for the 14 analysts covering WestRock is $50.79 (+18.7% above the current price).     

There is an ex-dividend date this Wednesday (2/10) of $.20 per share, so capturing this dividend is included in the potential return-on-investment results detailed below.  The time value obtained when this position was established was $.23 per share [$3.02 options premium - ($42.79 stock price - $40.00 strike price)].  In the unlikely event that the owner of these Call options exercises their option tomorrow afternoon (on the day before the ex-dividend date), the Covered Calls Advisor would make a $89.32 profit [($.23 x 400 shares) - $2.68 commission] in two days.      

A potential return-on-investment result if this position closes in-the-money at the February 19th options expiration date is +1.1% absolute return in 12 days (equivalent to a +32.9% annualized return-on-investment).  

WestRock Company (WRK) -- New Covered Calls Position
The simultaneous buy/write transaction was as follows:
02/08/2021 Bought 400 shares of WestRock stock @ $42.79 per share 
02/08/2021 Sold 4 WRK February 19th, 2021 $40.00 Call options @ $3.02 per share
Note: the Implied Volatility of the Call option was 27.9
02/10/2021 Upcoming ex-dividend of $.20 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $15,910.68
= ($42.79 - $3.02) * 400 shares + $2.68 commission

Net Profit Components:
(a) Options Income: +$1,208.00
= ($3.02 * 400 shares)
(b) Dividend Income: +$80.00
= $.20 per share x 400 shares 
(c) Capital Appreciation (If WRK stock is above $40.00 strike price at the Feb. 19th options expiration): -$1,116.00
= ($40.00 -$42.79) * 400 shares

Total Net Profit: +$172.00
= (+$1,208.00 options income +$80.00 dividend income - $1,116.00 capital appreciation)

Absolute Return: +1.1%
= +$172.00/$15,910.68
Equivalent Annualized Return: +32.9%
= (+$172.00/$15,910.68)*(365/12 days)

These returns will be achieved if the stock is above the $40.00 strike price at the market closing on the February 19th, 2021 options expiration date.  If the stock declines below the strike price, the breakeven price of $39.57 ($42.79 -$3.02 -$.20) provides 7.5% downside breakeven protection below today's purchase price.

Email me at partlow@cox.net if you have any questions related to Covered Calls investing.

Jeff

Established Cash-Secured Put Position in Alibaba Group Holdings Ltd.

A Covered Calls position in Alibaba Group Holdings Ltd. (ticker BABA) was closed out profitably last Friday since the stock was in-the-money at the options expiration date.  The Covered Calls Advisor wants to continue a position in Alibaba, so this morning a new position was established.  One February 26th, 2021 100% Cash-Secured Put option was sold at the $250.00 strike price at $3.10 per share when the price of Alibaba stock was $263.01 (5.2% above the strike price).  This is a moderately conservative position since the probability of assignment on the options expiration date was 74.9% when this position was established.  

A Cash-Secured Put option was sold instead of its comparable Covered Call in this case.  The Open Interest in the Puts was 2,301 contracts versus a much lower 566 for the Calls and likewise, the Bid/Ask spread on the Puts was only $.35 per share versus $.80 for the Calls, so the Covered Calls Advisor determined that there was a greater likelihood that a Cash-Secured Put limit order at $3.10 would be executed compared with a Covered Call with an identical $3.10 time value.    

The 34.2 Implied Volatility for the Put option was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 21.8 -- so the $3.10 Put option price was a nice premium to receive for this out-of-the-money (i.e. strike price below the current stock price) Put option.  Also important to the Covered Calls Advisor, there is no earnings report prior to the February 26th, 2021 options expiration date.     

As detailed below, for this Alibaba Cash-Secured Puts position there is potential for a +1.3% absolute return in 19 days (equivalent to a +24.1% annualized return-on-investment).  

Alibaba Group Holdings Ltd. (BABA) -- New 100% Cash-Secured Put Position
The transaction today was as follows:
02/08/2021  Sold 1 Alibaba February 26th, 2021 $250.00 100% Cash-Secured Put option @ $3.10 per share.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the one Put option sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Cost Basis: $24,690.67
= ($250.00 - $3.10) * 100 shares + $.67 commission

Net Profit:
(a) Options Income: +$309.33
= ($3.10 * 100 shares) - $.67 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA is above $250.00 strike price at the Feb. 26th expiration): +$0.00
= ($250.00 - $250.00) * 100 shares

Total Net Profit (If Alibaba stock price is above $250.00 strike price at options expiration): +$309.33
= (+$309.33 option income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Alibaba is above $250.00 strike price at the Feb. 26th options expiration) : +1.3%
= +$309.33/$24,690.67
Annualized Return: +24.1%
= (+$309.33/$24,690.67)*(365/19 days)

The downside 'breakeven price' at expiration is at $246.90 ($250.00 - $3.10), which is 6.1% below the current market price of $263.01.