Eli Lilly (LLY) has their ExDiv date scheduled for August 11. Last week I was short the AUG 34 Calls, which were deep ITM with the stock at $36+. On August 6th (last Friday) I made the decision to roll those AUG 34 Calls UP and OUT to SEP 37′s because of the looming ExDiv date. This strategy cost me $2.29 in debit – what a lot of Covered Call Writer’s would cringe at. Only the future can tell us if this was a good move or not. Just for fun, let’s take a look at the data and some possible scenarios:
- The result of the roll up/out is raising my cost basis from $32.90 to $35.19. If the stock gets called, I will still make a 4.9% return.
- LLY will pay a $0.49 dividend on 9/10, bringing my cost basis down to 34.70 and a 6.2% return if called in September (I have only been in this Covered Call for 3 months).
- Right now, LLY has a published 5.3% Dividend Yield – and that’s if I don’t write any Calls against it. Yes, of course I want to hang on to this stock! Based on my original entry price of $34.85 for the stock, my Dividend Yield is 5.6%
Scenario 1 – The price continues to rise and is above the $37 strike near SEP expiration. Since there is no danger of an ExDiv date, I would probably just roll the ITM SEP 37 to an OCT 37. If the price has made a big move up, I would consider a roll up maybe one strike.
Scenario 2 – The price consolidates and remains below the $37 strike. Again, if the price is not too low it would call for another roll out at $37.
Scenario 3 – The price pulls all the way back below my Cost Basis of $34.70. Since I still make a Dividend Yield of at least 5%, I would let the SEP 37 expire worthless and wait for the stock to recover while collecting those $0.49 Dividends each quarter. It would also be prudent to consider loading up on more shares if there is enough capital. I have two very important rules that I never break: 1) I would NEVER write a Call any further out than the next month in order to capture more credit and 2) I would NEVER write a Call with a strike below my Cost Basis.
This company has strong, steady and solid fundamentals (great profit margins, steady revenue growth and plenty of cash). I expect the dividends to keep on coming (they have since 1885) and may even increase (42 years of consecutive dividend increases). Yes, I see that the current price is very near a resistance level of $37.50, but that’s OK – I am ready to deal with any possible price movement – or none at all.
◄ Jeff ►
