DGI Adventure 10-22-16 Sold Covered Call – Valero Energy Corporation (VLO) – $58.50 strike – Nov 11 Expiration

This trade was actually executed on Tuesday 10/18/16. I didn’t get a chance to write about it until today.

I sold a VLO Nov 11 ‘16 $58.50 call option for a premium of $53.22 after fees, which works out to a 0.91% absolute return (using the $58.50 strike as the denominator “at risk”). Since the trade will be in force for 24 days, that works out to a 13.84% annualized return.

I will have to keep a close eye on the press releases announcing the next ex-dividend date. In the past it has been in mid-November, but the Q3 ex-div was earlier than I expected (08/09/16) and I ended up rolling my position out to make sure I didn’t get assigned early. If they make 11/09 the ex-div I might end up scrambling again if the share price is close to or in the money.

Once again, the premium is almost the equivalent of a quarterly dividend distribution, but, as I mentioned, it will be earned in less than a month’s time.

My previous call option, which had a $58.00 strike, expired worthless on 10/07/16. I didn’t immediately open up another position against the shares because the price was trading kind of flat and was still below $55/share on Monday 10/10, which meant that to collect a decent premium I’d have to go way out in duration or take a lower strike price than the previous trade.   

I decided to let it ride for a bit because it’s not uncommon for VLO to have a big single day movement for no apparent reason. If I wait to sell a call on a day with a big pop, I can get much better terms. I also think that shares are on the lower end of the fair value spectrum, so I’d rather be picky than chase the constant stream of premium income.

Fortunately I only had to wait a little over a week before shares popped on Tuesday, and I actually got to stretch my strike price up a little bit from the last time.

VLO – 2 Week Chart – Courtesy Google Finance

Woo hoo!

…kind of.

According to my most recent VLO investment thesis, which I did back in June, I’ve estimated the fair value to be around $80/share. So selling them for $58 would kind of suck in that context.

Now, $80 is based on a dividend discount model with a 7% assumed dividend growth rate (10% discount). I’ll admit that might be a little too optimistic.

$58/share implies closer to a 6% dividend growth rate with the same discount, and is probably about as low as I want to go for selling call options.

I’d much rather be selling calls in the mid $60s or above but Mr. Market isn’t cooperating, so I’ll just plod along for a while here and hope the price doesn’t move against me too drastically. I’m not super excited about that, but I’m only so patient. I do want the premium income after all!

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