Established Holly Frontier Corporation Covered Calls -- Example of Early Assignment or Dividend Capture Strategy

Today, a new covered calls position was established in Agnico Eagle Mines Ltd. (Ticker Symbol AEM) with a Dec2013 expiration and at the $27.50 strike price. The transactions are as follows:

10/31/2013 Bought 600 AEM shares @ $29.086
10/31/2013 Sold 6 AEM Dec2013 $27.50 Call Options @ $2.72
Note: the price of AEM was $29.20 today when these options were sold.
11/27/2013 Ex-dividend of $.22 per share

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $.22 with an ex-dividend date of November 27th.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.134 [$2.72 option premium - ($29.086 stock price - $27.50 strike price)] remaining in the short call option decays to less than $.22 by November 26th (the day prior to the ex-div date), then there is a possibility that the call options owner will exercise early and will call the stock away to capture the dividend. As shown below, two potential returns for this position are:

If Early Assignment: +3.8% absolute return (equivalent to +51.8% annualized return for the next 27 days) if the stock is assigned early (day prior to Nov 27th ex-div date); OR

If Dividend Capture:  +4.6% absolute return (equivalent to +32.2% annualized return over the next 52 days) if the stock is assigned at Dec 2013 expiration on December 20th.

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide a very good return.  These returns will be achieved as long as the stock is above the $27.50 strike price at assignment -- a nice 4.7% of downside protection.  Alternatively, if the stock declines below the strike price, the breakeven price of $26.146 ($29.086-$.22-$2.72) provides a very substantial 9.4% downside protection. 

In summary, this covered calls investment provides a very nice annualized ROI potential for such a conservative (hedged with substantial downside protection and the next earnings announcement is after the December options expiration date) investment. 

Two possible overall performance results (including commissions) for this Agnico Eagle(AEM) covered calls position are as follows:
Stock Purchase Cost: $17,460.55
= ($29.086*600+$8.95 commission)

Net Profit:
(a) Options Income: +$1,618.55
= ($2.72*600 shares) - $13.45 commissions
(b) Dividend Income (If option exercised early on day prior to Nov 27th ex-div date): +$0.00
(b) Dividend Income (If stock assigned at Dec2013 expiration): +$132.00 = ($.22 dividend per share x 600 shares); or

(c) Capital Appreciation (If stock assigned early on Nov 26th): -$949.75
+($27.50-$29.086)*600 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $27.50 at Dec2013 expiration): -$949.75
+($27.50-$29.086)*600 - $8.95 commissions

Total Net Profit (If option exercised on day prior to Nov 27th ex-div date): +$668.80
= (+$1,618.55 +$0.00 -$949.75); or
Total Net Profit (If stock assigned at $27.50 at Dec2013 expiration): +$800.80

= (+$1,618.55 +$132.00 -$949.75)

1. Absolute Return (If option exercised on day prior to Nov 27th ex-div date): +3.8%
= +$668.80/$17,460.55
Annualized Return (If option exercised early): +51.8%
= (+$668.80/$17,460.55)*(365/27 days); OR

2. Absolute Return (If stock assigned at $27.50 at Dec2013 expiration): +4.6%
= +$800.80/$17,460.55
Annualized Return (If stock assigned): +32.2%

= (+$800.80/$17,460.55)*(365/52 days);