Tuesday, February 25, 2020

Selling calls in a down market is possible CVS

  • Down markets can still provide call option opportunity
  • Looking for a stock that will continue to pay the dividend even in a down market
  • Making sure the expiration date captures the next dividend
  • Searching for an over 10% potential gain should the call be exercised

CVS is a stock that has a low P/E (price earnings ratio) forward looking 9.54 and a good dividend yield currently 2.8%.   Even a 30 year U.S. Treasury cannot deliver that kind of income.

Readers know the criteria I use to pick a dividend stock and here are the facts on CVS.

CVS Earnings Dividend
 Earnings > Dividend $5.09 $2.00
 Debt to Equity 1.43
 Dividend Yield 2.98%
 3 Yr. Rev. Growth 8.90%

The call I sold this morning 2/25/20 on CVS after a more than 1,000 point decrease in the DOW industrials yesterday  and a further erosion in the range of 300-400 points today is presented in the table below.

CVS is down 1.86 points today and off its 52 week high of $77.03 by over 14%. Yet, someone thinks CVS has potential and they are willing to pay me $1.25 per share to buy low.  And I am willing to buy low and take the $1.25 per share in hopes that I will keep the stock.  On other hand, I can also hope they take my shares because then I pocket an over 12% gain.

In the milieux of politics with its potential effects on the stock market, CVS will be volatile and both scenarios are possible.  

Note this call's expiration captures the next dividend.  The value of the call premium is worth 2 and 1/2 dividends.   For an income investor this is a very good outcome.

Stock Price on Open Call Expiration 
CVS $67.15 5/15/2020
Cost Basis:   2/25/2020 $66.07
Strike Price: $72.50
Call Premium:  $1.25
Dividend  4/22/2020 $0.500
Call Yield on Basis 1.89%
Call + Dividend Yield on Basis 2.65%
$ Gain if Assigned $8.18
Max Return  if Assigned 12.38%

M* MoneyMadam
Disclosure: Long CVS with some shares on call

Use the covered call calculator below to determine how a call would work for you.

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Enter Dividend if ex-div before Option Expiration:
Call Yield
Total Return Percent if Assigned