Established Covered Calls Position in Truist Financial Corporation Using the Dividend Capture Strategy

Today a Covered Calls position was established in Truist Financial Corporation (ticker symbol TFC) when the Covered Calls Advisor's buy/write limit order was executed -- 300 shares were purchased at $58.88 and 3 May 21st, 2021 Call options were sold at $1.90 at the $57.50 strike price. 

There is an upcoming ex-dividend of $.45 per share (a 3.0% annualized dividend yield) on May 13th.  Two potential return-on-investment results for this position are detailed below (including the possibility of early exercise since the ex-dividend is prior to the May 21st options expiration date).  Given the Covered Calls Advisor's current Overall Market Meter outlook, a conservative in-the-money Covered Calls position was established -- the Delta was 69.0, which approximates the probability that the Call options will be in-the-money on the options expiration date.  There is no earnings report prior to the May 21st options expiration date.

Truist is a large regional bank in the Mid-Atlantic and Southeast U.S. that resulted from the merger in December 2019 of BB&T and SunTrust Bank.  Earnings have exceeded analysts' estimates every quarter since the merger and 2021 earnings per share are estimated at $4.62 which is 21% above the 2020 actual results and a forward P/E ratio of only 12.7 based on today's purchase price.  For banks, the Covered Calls Advisor likes to consider Price/Book Value and Truist is currently priced at a reasonable P/BV valuation of 1.18.  In addition, it should continue to benefit from both GDP growth and  higher net interest margins this year compared with the very low interest rates during comparable quarters last year.    

As detailed below, two potential return-on-investment results are: 

•  +0.9% absolute return (equivalent to +37.0% annualized return for the next 9 days) if the stock is assigned early (business day prior to the May 13th ex-dividend date); OR 

• +1.7% absolute return (equivalent to +34.5% annualized return over the next 18 days) if the stock is assigned on the May 21st options expiration date.

 
Truist Financial Corporation (TFC) -- New Covered Calls Position
The buy/write transaction was:

5/04/2021 Bought 300 Truist Financial shares @ $58.88
5/04/2021 Sold 3 TFC 5/21/2021 $57.50 Call options @ $1.90
Note: the Time Value (aka Extrinsic Value) in the Call options was $.52 per share = [$1.90 Call options premium - ($58.88 stock price - $57.50 strike price)]
5/13/2021 Upcoming quarterly ex-dividend of $.45 per share

Two possible overall performance results (including commissions) for this Truist Financial Covered Calls position are as follows:
Covered Calls Cost Basis: $17,096.01
= ($58.88 - $1.90) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$570.00
= ($1.90 * 300 shares)
(b) Dividend Income (If options exercised early on May 12th, the business day prior to the May 13th ex-div date): +$0.00; or
(b) Dividend Income (If Truist Financial stock assigned at May 21st, 2021 expiration): +$135.00
= ($.45 dividend per share x 300 shares)

(c) Capital Appreciation (If TFC Call options assigned early): -$414.00
+($57.50 - $58.88) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $57.50 strike price at options expiration): -$414.00
+($57.50 - $58.88) * 300 shares

1. Total Net Profit [If option exercised on May 12th (business day prior to May 13th ex-dividend date)]: +$156.00

= (+$570.00 options income +$0.00 dividend income -$414.00 capital appreciation); or

2. Total Net Profit (If Truist shares assigned at $57.50 strike price at May 21st, 2021 expiration): +$291.00

= (+$570.00 options income +$135.00 dividend income -$414.00 capital appreciation)

1. Absolute Return (If option exercised early on May 12th): +0.9%

= +$156.00/$17,096.01

Annualized Return (If option exercised early on May 12th): +37.0%

= (+$156.00/$17,096.01) * (365/9 days); or

2. Absolute Return (If Truist shares assigned at $57.50 at May 21st, 2021 options expiration): +1.7%

= +$291.00/$17,096.01

Annualized Return (If TFC shares assigned at $57.50 at May 21st, 2021 expiration): +34.5%

= (+$291.00/$17,096.01)*(365/18 days)

Either outcome provides an attractive return-on-investment result for this Truist Financial investment.  These returns will be achieved as long as the stock is above the $57.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $56.53 ($58.88 -$1.90 -$.45) provides 4.0% 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 must be 'YES' prior to establishing a position.  As shown below with this Truist Financial position, all nine criteria were met.

Covered Call Established in Alibaba Group Holdings Ltd.

Today a Covered Call position was established in Alibaba Group Holdings Ltd. (ticker symbol BABA) when the Covered Calls Advisor's buy/write limit order was executed.  One hundred shares were purchased at $232.14 and one May 14th, 2021 Call option was sold at $10.24 at the $225.00 strike price.  The time value when this Covered Call was established was $3.10 per share = [$10.24 Call option price - ($232.14 stock price - $225.00 strike price)], so the downside breakeven price is $221.90 ($225.00 strike price - $3.10 time value).  Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Call position was established with the Delta at 70.6, which approximates a probability of 70.6% that the Call option will be in-the-money on the options expiration date.

Alibaba is a core holding of the Covered Calls Advisor, so since a prior BABA Covered Call with an expiration last Friday was in-the-money and therefore was closed out by assignment, this new position was established to continue with Alibaba as a part of the the Covered Calls Advisor Portfolio.  Alibaba's next earnings report is on May 13th (the day prior to the options expiration date), so before the 13th I will decide whether to close out the position early (my most likely decision) or instead to maintain it through the earnings report.  

As detailed below, a potential return-on-investment result for this Alibaba position is +1.4% absolute return (equivalent to +42.4% annualized return over the next 12 days) if the stock is in-the-money and therefore assigned on the May 14th, 2021 options expiration date.

 

Alibaba Group Holdings Ltd. (BABA) -- New Covered Call Position

The buy/write transaction was as follows:
05/03/2021 Bought 100 shares of Alibaba stock @ $232.14 per share 
05/03/2021 Sold 1 Alibaba May 14th, 2021 $225.00 Call option @ $10.24 per share
Note: The Implied Volatility of the Call option was 32.3 when this transaction was executed.  

A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $22,190.67
= ($232.14 - $10.24) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$1,023.33
= ($10.24 * 100 shares) - $.67 commission
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $225.00 strike price at May 14th, 2021 expiration): -$714.00
= ($225.00 -$232.14) * 100 shares

Total Net Profit: +$309.33
= (+$1,023.33 Call option income +$0.00 dividend income -$714.00 capital appreciation)

Absolute Return-on-Investment: +1.4%
= +$309.33/$22,190.67
Equivalent Annualized Return-on-Investment: +42.4%
= (+$309.33/$22,190.67)*(365/12 days)

April 30th, 2021 Options Expiration Results

The Covered Calls Advisor Portfolio had two Covered Calls positions (Alibaba Group Holdings Ltd. and Applied Materials Inc.) with April 30th, 2021 options expirations.  Both positions closed in-the-money, so the maximum potential return-on-investment results were achieved for these positions.   The results were:

• Alibaba Group Holdings Ltd. (BABA) -- +1.3% absolute return (equivalent to +42.7% annualized roi) for the 11 days of this investment
• Applied Materials Inc. (AMAT) -- +1.5% absolute return (equivalent to +45.0% annualized roi) for the 12 days of this investment
  

The cash now available from the assignment (i.e. closing) of the two in-the-money positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Given the Covered Calls Advisor's currently cautious Overall Market outlook, new positions will be hedged by continuing to establish Covered Calls at moderately in-the-money strike prices with good downside protection. 

The detailed transactions and results for these two closed positions are as follows:

1. Alibaba Group Holdings Ltd. (BABA) -- Covered Call Closed by Assignment at Expiration

The buy/write transaction was as follows:
04/20/2021 Bought 100 shares of Alibaba stock @ $229.44 per share 
04/20/2021 Sold 1 Alibaba April 30th, 2021 $225.00 Call option @ $7.30 per share
Note: The Implied Volatility of the Call option was 29.2 when this transaction was executed.
04/30/2021 Alibaba shares were in-the-money at options expiration so the option expired and the 100 shares were assigned (i.e. sold) at the $225.00 strike price.  

The overall performance result (including commissions) was as follows:
Covered Call Cost Basis: $22,214.67
= ($229.44 - $7.30) * 100 shares + $.67 commission

Net Profit Components:
(a) Option Income: +$730.00
= ($7.30 * 100 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (BABA stock was above $225.00 strike price at April 30th, 2021 expiration): -$444.00
= ($225.00 -$229.44) * 100 shares

Total Net Profit: +$286.00
= (+$730.00 Call option income +$0.00 dividend income -$444.00 capital appreciation)

Absolute Return-on-Investment: +1.3%
= +$286.00/$22,214.67
Equivalent Annualized Return-on-Investment: +42.7%
= (+$286.00/$22,214.67)*(365/11 days)

2.  Applied Materials Inc. -- Covered Calls Position Closed by Assignment at Expiration
The buy/write transaction was:
04/19/2021 Bought 300 Applied Materials Inc. shares @ $129.45
04/19/2021 Sold 3 AMAT April 30th, 2021 $125.00 Call options @ $6.27
Note: the Open Interest in the Calls was 212 contracts.
04/30/2021 300 AMAT shares were in-the-money at options expiration so the three options expired and the 300 shares were assigned (i.e. sold) at the $125.00 strike price.

The overall performance result (including commissions) for this Applied Materials Covered Calls position was as follows:
Covered Calls Position Cost Basis: $36,896.01
= ($129.45 stock price -$6.27 options price) *300 shares +$2.01 commissions

Net Profit:
(a) Options Income: +$1,881.00
= ($6.27 * 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (300 AMAT shares assigned at $125.00 strike price at April 30th options expiration): -$1,335.00
= ($125.00-$129.45) * 300 shares

Total Net Profit (AMAT shares assigned at $125.00 at options expiration): +$546.00

= (+$1,881.00 options income +$0.00 dividend income -$1,335.00 capital appreciation)

Absolute Return: +1.5%

= +$546.00/$36,896.01

Annualized Return: +45.0%

= (+$546.00/$36,896.01)*(365/12 days)

Please email me with any questions or comments related to anything related to Covered Calls investing.

Best Wishes and Godspeed,
Jeff Partlow
partlow@cox.net

Established Covered Calls in KB Home

Today a new Covered Calls position was established in KB Home (ticker KBH) with a May 21st options expiration date.  A buy/write transaction was made with 300 shares purchased at $48.49 and three Calls sold at the $46.00 strike price for $3.11 per share. Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established.  The Delta was 72.4 and this approximates a probability of 72.4% that the Call options will be in-the-money and therefore the stock assigned on the options expiration date. Two potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the May 5th, 2021 ex-dividend is prior to the May 21st, 2021 options expiration date.

KB Home is a home builder with high exposure to entry-level built-to-order homes, a good niche in the current market environment.  In this regard, there are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently very positive for homebuilders.  Also, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100).  This month's index is 83 which is near its all-time high (since 1985) of 90 (Note: The lowest rating of 8 was in January 2009).  So we are definitely now in a strong "sellers' market".  The Covered Calls Advisor will continue to track these factors and will likely remain invested in monthly Covered Calls in companies in this industry as long as all three of these conditions remain positive.

Despite the pandemic, the most recent fiscal year's (2020) earnings exceeded 2019, and 2021 revenues are estimated to increase by 40% above 2020; and earnings by even more, to approximately $5.80 per share (a forward P/E ratio of only 8.4).   

The 33.2 Implied Volatility for these KB Home Call options was attractive to the Covered Calls Advisor since it is substantially higher than the current S&P 500 Volatility Index (VIX) of 18.5.  Finally, the average price target of 15 analysts covering the company is $53.09 (+9.5% above its current price).  

As detailed below, two potential return-on-investment results are: 

•  +1.4% absolute return (equivalent to +99.7% annualized return for the next 5 days) if the stock is assigned early (business day prior to the May 5th ex-dividend date); OR 

• +1.7% absolute return (equivalent to +28.1% annualized return over the next 22 days) if the stock is assigned on the May 21st options expiration date.

 

KB Home (KBH) -- New Covered Calls Position
The Buy/Write transaction today was as follows:
04/30/2021 Bought 300 KB Home shares @ $48.49
04/30/2021 Sold 3 KB Home 05/21/2021 $46.00 Call options @ $3.11
Note: the Time Value (aka Extrinsic Value) in the Call options was $.62 per share = [$3.11 Call options premium - ($48.49 stock price - $46.00 strike price)]
05/05/2021 Upcoming quarterly ex-dividend of $.15 per share

Two possible overall performance results (including commissions) for this KB Home Covered Calls position are as follows:
Covered Calls Cost Basis: $13,616.01
= ($48.49 - $3.11) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$933.00
= ($3.11 * 300 shares)
(b) Dividend Income (If option exercised early on May 4th, the business day prior to the May 5th ex-div date): +$0.00; or
(b) Dividend Income (If KB Home stock assigned at May 21st, 2021 expiration): +$45.00
= ($.15 dividend per share x 300 shares)

(c) Capital Appreciation (If KB Home Call options assigned early on May 4th): -$747.00
+($46.00 - $48.49) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $46.00 strike price at options expiration): -$747.00
+($46.00 - $48.49) * 300 shares

1. Total Net Profit [If option exercised on May 4th (business day prior to May 5th ex-dividend date)]: +$186.00

= (+$933.00 options income +$0.00 dividend income -$747.00 capital appreciation); or

2. Total Net Profit (If KB Home shares assigned at $46.00 strike price at May 21st, 2021 expiration): +$231.00

= (+$933.00 +$45.00 -$747.00)

1. Absolute Return (If option exercised early on Feb. 2nd): +1.4%

= +$186.00/$13,616.01

Annualized Return (If option exercised early): +99.7%

= (+$186.00/$13,616.01)*(365/5 days); or

2. Absolute Return (If KB Home shares assigned at $46.00 at May 21st, 2021 options expiration): +1.7%

= +$231.00/$13,616.01

Annualized Return (If KB Home shares assigned at $38.00 at Feb 19th, 2021 expiration): +28.1%

= (+$231.00/$13,616.01) * (365/22 days)

Early assignment is unlikely, but assignment on the expiration date would also provide a good return-on-investment result for this KB Home investment.  These returns will be achieved as long as the stock is above the $46.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $45.23 ($48.49 -$3.11 -$.15) provides 6.7% 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 must be 'YES' prior to establishing a position.  As shown below with this KB Home position, eight criteria were achieved.