DGI Adventure 09-07-16 Sold Covered Call – Valero Energy Corporation (VLO) – $58.00 strike – Oct 07 Expiration

This trade was actually executed yesterday 09/06/16. I sold the covered call for $56.22, which is a 0.97% absolute gain on the $58 strike price. The trade will be in force for 31 days making for an 11.42% annualized gain. The premium is nearly the equivalent of a quarterly dividend payment, but with a duration a third of the time. Next ex-div date shouldn’t be till November sometime so early assignment is a low probability issue.

Here’s a quick timeline to get you caught up to speed on these 100 shares of VLO that I own:

Step 1: sold cash secured put on 06/08/16 for $72.22 after commissions. $53/share strike price with a 06/24/16 expiry (16 days in force).

Step 2: That put almost expired out of the money, but 06/24/16 was the day after the Brexit vote, and everything went bonkers. 100 shares were assigned for $5,300.

Step 3: After post brexit bouncing around, sold covered call on 07/07/16 for $48.22 after commissions. $54.50/share strike price with a 08/12/16 expiry (35 days in force)

Step 4: Management surprisingly announces 08/09/16 ex-dividend date. Early assignment is in play.

Step 5: Shares trading precipitously close to $54.50/share on 08/08/16 (day before ex-div, 4 days till expiry). Rolled out position just to be safe. Netted $58.43 after commissions, and bumped strike price up to $55.00/share with 09/02/16 expiry.

Step 6: Shares close on 09/02/16 at $54.83/share, call option expires worthless (barely).

Step 7: Sold another covered call for $56.22 after commissions. Strike price increased to $58.00/share with a 10/7/16 expiry (31 days in force). This is the trade I’m posting about today.

Step 8: (tomorrow) $60 dividend which may or may not have been saved from early assignment around ex-div date is finally paid out.

Step 9: What will happen on October 7th? Only time will tell!

For those of you playing along at home that is $295.09 in options premiums and dividend income, which is 5.57% of the $5,300 I initially put at risk, and it will have been earned in a lightning fast 121 days (16.80% annualized return).

Of course if VLO shares climb above the $58/strike, they might be called away for a $500 capital gain ($58 – $53/share), which added to the options and dividend income, makes for a $795.09 total return (15% in 121 days is an annualized 45.25%).

If the shares are not called away, I will continue to sell covered calls so long as strike prices that are favorable to my cost basis are available.

Now it doesn’t always work out that perfectly, but I think that really illustrates the power the options can have on boosting the income one receives from a conventional dividend growth strategy.

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