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Friday, May 23, 2014

Established HollyFrontier Corporation Covered Calls -- Example of Possible Early Assignment or Dividend Capture

Today, a new covered calls position was established in HollyFrontier Corp (Ticker Symbol HFC) with a Jun2014 expiration and at the $47.00 strike price. The transactions are as follows:

5/23/2014 Bought 300 HFC shares @ $49.32
5/23/2014 Sold 3 HFC Jun2014 $47.00 Call Options @ $2.65
Note: the price of HFC was $49.38 today when these options were sold.
5/28/2014 Ex-dividend for special dividend of $.50 per share
6/4/2014 Ex-dividend of $.32 for quarterly dividend of $.32 per share

This covered calls investment is a strategic one that explicitly considers the upcoming special dividend of $.50 and also the quarterly dividend of $.32.  If the current time value (i.e. extrinsic value) of $.33 [$2.65 option premium - ($49.32 stock price - $47.00 strike price)] remaining in the short call option decays further prior to the ex-div dates, then there is a possibility that the call options owner will exercise early and will call the stock away to capture the dividend(s). 

As shown below, three potential returns for this position are:
If Early Assignment: +0.5% absolute return (equivalent to +38.9% annualized return for the next 5 days) if the stock is assigned early (day prior to May 28th ex-div date); OR
If Early Assignment: +1.5% absolute return (equivalent to +47.0% annualized return for the next 12 days) if the stock is assigned early (day prior to June 4th ex-div date); OR

If Both Dividends Captured:  +2.2% absolute return (equivalent to +26.7% annualized return over the next 30 days) if the stock is assigned at Jun2014 expiration on June 20th.

As is often the case, early assignment provides a higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but any of these three outcomes would provide a very good return on investment result.  These returns will be achieved as long as the stock is above the $47.00 strike price at Jun2014 expiration.   

In summary, this covered calls investment provides a very nice annualized ROI potential for a conservative (hedged with substantial downside protection and the next earnings announcement is after the Jun2014 options expiration date) investment. 

Three possible overall performance results (including commissions) for this HollyFrontier Corp (HFC) covered calls position are as follows:
Stock Purchase Cost: $14,804.95
= ($49.32*300+$8.95 commission)

Net Profit:
(a) Options Income: +$783.80
= ($2.65*300 shares) - $11.20 commissions
(b) Dividend Income (If option exercised early on day prior to May 28th ex-div date): +$0.00; or
(b) Dividend Income (If option exercised early on day prior to June 4th ex-div date): +$150.00 = $.50*300 shares; or
(b) Dividend Income (If stock assigned on Jun2014 options expiration date): +$246.00
= ($.50 + $.32)  dividends per share x 300 shares)
(c) Capital Appreciation (If stock assigned early on May 27th): -$704.95
+($47.00-$49.32)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned early on June 3rd): -$704.95
+($47.00-$49.32)*300 - $8.95 commissions; or
(c) Capital Appreciation (If stock assigned at $47.00 at Jun2014 expiration): -$704.95
=+($47.00-$49.32)*300 - $8.95 commissions

Total Net Profit (If option exercised on day prior to May 28th ex-div date): +$78.85
= (+$783.80 +$0.00 -$704.95); or
Total Net Profit (If option exercised on day prior to June 4th ex-div date): +$228.85
= (+$783.80 +$150.00 -$704.95); or
Total Net Profit (If stock assigned at $47.00 on Jun2014 options expiration date): +$324.85
= (+$783.80 +$246.00 -$704.95)

1. Absolute Return (If option exercised on day prior to May 28th ex-div date): +0.5%
= +$78.85/$14,804.95
Annualized Return (If option exercised on May 27th): +38.9%
= (+$78.85/$14,804.95)*(365/5 days); OR

2. Absolute Return (If option exercised on day prior to June 4th ex-div date): +1.5%
= +$228.85/$14,804.95
Annualized Return (If option exercised on June 3rd): +47.0%
= (+$228.85/$14,804.95)*(365/12 days); OR

3. Absolute Return (If stock assigned at $47.00 at Jun2014 options expiration date): +2.2%
= +$324.85/$14,804.95
Annualized Return (If stock assigned on Jun2014 options expiration date): +26.7%
= (+$324.85/$14,804.95)*(365/30 days);