Established Foot Locker Inc. Covered Calls

Today, a new covered calls position was established in Foot Locker Inc. (Ticker Symbol FL) with an Oct2013 expiration and at the $32.00 strike price. The transactions are as follows:
09/13/2013 Bought 300 FL shares @ $32.67
09/13/2013 Sold 3 FL Oct2013 $32.00 Call Options @ $1.35
Note: Oct2013 options expiration is 10/18/2013 and next FL ex-dividend of $.20 per share is on 10/16/2013.

This covered calls investment considers the upcoming quarterly dividend of $.20 with an ex-dividend date on October 16th.  If the current time value (i.e. extrinsic value) of $.68 = [$1.35 option premium - ($32.67 stock price - $32.00 strike price)] remaining in the short call option decays to less than the $.20 ex-dividend amount by Oct. 15th (the day prior to the ex-div date), then there is a reasonably good possibility that the call options owner would exercise early and would call the stock away to capture the dividend. As shown below, two potential returns for this position are:

If Early Assignment: +1.87% absolute return (equivalent to +20.7% annualized return) if the stock is assigned early (day prior to October 16th ex-div date); OR

If Dividend Capture and stock assigned at Oct2013 expiration: +2.49% absolute return (equivalent to +24.5% annualized return) if the stock is assigned at October 2013 expiration on October 18th

Either outcome would provide a very satisfactory return.  These returns will be achieved as long as the stock stays above the $32.00 strike price at assignment (2.05% of downside protection).  Alternatively, if the stock declines below the strike price, the breakeven price of $31.32 ($32.67-$1.35) provides a nice 4.13% downside protection from the original $32.67 stock purchase price. 


The detailed transactions and two possible performance results for this Foot Locker Inc.(FL) covered calls position is as follows:
Stock Purchase Cost: $9,809.95
= ($32.67*300+$8.95 commission)

Net Profit:
(a) Options Income: +$393.80
= ($1.35*300 shares) - $11.20 commissions
(b) Dividend Income (If option exercised early on day prior to Oct 16th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Oct2013 expiration): +$60.00
= ($.20 dividend per share x 300 shares); or

(c) Capital Appreciation (If stock assigned early on October 15th): -$209.95
+($32.00-$32.67)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $32.00 at Oct2013 expiration): -$209.95
+($32.00-$32.67)*300 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Oct 16th ex-div date): +$183.85
= (+$393.80 +$0.00 -$209.95); or
Total Net Profit (If stock assigned at $32.00 at Oct2013 expiration): +$243.85

= (+$393.80 +$60.00 -$209.95)

1. Absolute Return (If option exercised on day prior to Oct 16th ex-div date): +1.87%
= +$183.85/$9,809.95
Annualized Return (If option exercised early): +20.7%
= (+$183.85/$9,809.95)*(365/33 days); OR

2. Absolute Return (If stock assigned at $32.00 at Oct2013 expiration): +2.49%
= +$243.85/$9,809.95
Annualized Return (If stock assigned): +24.5%

= (+$243.85/$9,809.95)*(365/37 days)