Assigned on NUE Covered Call, Profit of $240 in 6 Days, 1% Return on Capital or 44% Annualized

On March 24 we established a Covered Call on NUE. The objective of the trade was to capture a dividend of $.405 (ex-div on March 30). We purchased 500 shares of the stock @$69.17 and wrote 5 “in the money” Apr 1 $67 Call options for a premium. of $2.64 per share . The call option premium provided 3.8% protection against a potential decline in stock value before we could collect the dividend.

The graph shows what happened after the CC was established. NUE stock had a run up in price (blue line) and closed yesterday at $78.75. At the close we were generating profits of $4,790 on the stock and a loss of $3,331 (red line) on the options.

The owner of the calls elected to call the shares away last night so they could collect the $.405 dividend. We sold the shares at $67 resulting in a loss of $1,,085 on the stock. Our short options became $0 and generated a profit of $1,394 resulting in net position profit of $240. Graphs shows the impact of the assignment with stock losing, option gaining and a small net profit.

$240 is not a lot of money in an account of any size…..but with market dynamics and volatility so hard to predict it was a reasonably “safe” trade that generated an annal return of 44%. They key is stringing a series of these “dividend capture” trades together on a weekly basis. In this situation the return on our investment was higher with the shares getting called away but the after tax gain would likely be higher collecting the dividend (taxed at a lower % than the gain on stock/option). We have five similar trades in play this week. My concern with the strategy is having one of the stocks experience a big decline that would offset the benefit of many smaller gains. If the strategy works over time we can easily scale the size of the trades to generate higher $ returns. If the stock falls below the short strike price we have an option of continuing to sell calls against the stock or selling the stock.