We like the covered call strategy because it allows us to generate consistent income through option premiums while still holding the underlying XOM stock.
This strategy offers downside protection, as the premiums help offset small declines in the stock price. Additionally, it works well in stable or slightly bullish markets, where the stock price isn’t expected to surge significantly.
By selling call options, we can create a steady income stream without needing to sell our shares, making it ideal for conservative investors looking for income generation and risk management. However, it does cap upside potential if the stock price rises significantly.
In addition to generating income from selling call options, another advantage of this strategy is the dividends earned by holding XOM stock. XOM is known for its consistent dividend payouts, providing a reliable stream of passive income.
By combining dividends with the premiums from covered calls, we enhance our overall return, making this strategy even more attractive for income-focused investors. This dual-income approach allows us to benefit from both option premiums and dividend payments while holding onto a strong dividend-paying stock like XOM.
Covered Call Strategy Using XOM: An Example from 2018 Onward:
-
Initial Account Value: $1,000,000
-
Date: January 1, 2018
-
Investment: Entire account is invested in XOM
The price of XOM on January 1, 2018, was $86.60 per share. So, with a $1,000,000 investment in XOM at $86.60 per share, we would have owned approximately 11,548 shares and we would be able to sell 115 call contracts based on owning 11,548 shares of XOM in 2018.
Covered Call Strategy:
-
Sell XOM call options that are $3 out of the money.
-
Options have about 30 days until expiration.
-
The process is repeated every 30 days.
Step 1: Initial Investment in XOM
On January 1, 2018, the entire $1,000,000 is invested in XOM.
-
XOM Price on January 1, 2018: Approximately $86.60 per share
-
Number of Shares Purchased: $1,000,000 / $86.60 ≈ 11,548 shares
Step 2: Implementing the Covered Call Strategy
For each month, we would sell a call option that is $3 out of the money and has approximately 30 days to expiration. The premium collected from selling these calls provides additional income.
Example: January 2018 Covered Call
-
XOM Price on January 1, 2018: $86.60
-
Strike Price for Call Option: $89.60 (approximately $3 out of the money)
-
Premium Received: Assume $1.50 per share (hypothetical value)
-
Total Premium Received: 11,548 shares * $1.50 = $17,322
Here’s an adjusted version of the relevant parts of the article, corrected to reflect that you can only sell 115 contracts based on the 11,548 shares of XOM owned.
Covered Call Strategy:
Sell XOM call options that are $3 out of the money.
Options have about 30 days until expiration.
The process is repeated every 30 days.
Example: January 2018 Covered Call
-
XOM Price on January 1, 2018: $86.60
-
Strike Price for Call Option: $89.60 (approximately $3 out of the money)
-
Premium Received: Assume $1.50 per share (hypothetical value)
-
Total Premium Received: 11,548 shares / 100 shares per contract = 115 contracts. Premium = $1.50 per share [115 contracts × 100 shares per contract × $1.50 = $17,250]
Premium Calculation for Each Year:
-
Premium per cycle:
-
115 contracts × 100 shares/contract × $1.50 premium/share = $17,250
-
-
Total premium per year (8 cycles per year):
-
8 × $17,250 = $138,000
-
Potential Outcomes for January 2018:
-
XOM Closes Below $89.60 at Expiration:
-
The option expires worthless.
-
We keep the $17,322 premium.
-
We still own our 11,548 shares of XOM.
-
We repeat the process for February 2018.
-
-
XOM Closes Above $89.60 at Expiration:
-
The option is exercised.
-
We sell 11,548 shares at $89.60 each, totaling $1,034,700.
-
We’ve captured the premium ($17,322) plus the capital gain on XOM ($3/share * 11,548 shares = $34,644).
-
Total gain: $34,644 + $17,322 = $51,966.
After selling, we could choose to reinvest the proceeds by buying XOM again and repeating the process.
-
Step 3: Repeating the Process Monthly
Assume this process is repeated each month, adjusting the strike price and expiration date according to XOM’s price movements.
Performance Over Time: Key Points
-
Income Generation: Every month, the account generates additional income from the premiums of selling covered calls. This can provide a steady stream of income, particularly in a retirement account like an IRA.
-
Capital Appreciation: If XOM rises significantly over time, the covered call strategy would cap our upside, as we may have to sell shares if the calls are exercised. However, we still capture gains up to the strike price plus the premium.
-
Downside Protection: The premiums collected offer a slight cushion against declines in XOM’s price, as they reduce the effective purchase price of XOM.
Backtesting the Strategy: 2018-2023
Let’s consider the general market and XOM’s performance over this period:
-
Bull Market Conditions (2018-2019):
-
XOM’s price fluctuated but didn’t experience significant growth like technology stocks. The covered call strategy likely resulted in some calls being exercised, leading to capped gains. However, the premium income provided additional returns.
-
-
Bear Market and Recovery (2020-2021):
-
During the COVID-19 pandemic, XOM’s stock price dropped significantly, particularly due to declining oil prices. However, the stock recovered in 2021 as oil prices rebounded.
-
In such conditions, the covered calls likely expired worthless, allowing we to retain the premium and keep the shares, which would have been beneficial during the downturn.
-
-
2022-2023:
-
XOM’s stock price surged as energy prices rose. The covered call strategy might have resulted in many options being exercised, leading to gains but also limiting upside as shares were sold at the strike price.
-
Hypothetical Performance
If XOM’s average annual return during this period was relatively modest compared to broader market indices, the covered call strategy provided additional income from the sale of call options, which helped boost the overall performance. Based on the assumptions in this strategy, an additional 13.8% per year was generated from the premiums collected, given that each round of call option sales added approximately $138,000 annually to the portfolio.
While the stock price of XOM fluctuated over the years, the income from the premiums helped to:
-
Smooth out volatility: The regular collection of premium income provided a consistent cash flow, which reduced the impact of market downturns, especially during periods like 2020 when XOM’s stock price declined.
-
Limit upside potential: In years where XOM’s stock price surged, such as in 2022, the strategy limited the gains because the shares would have been sold if the call options were exercised. However, this cap was offset by the premium income, which consistently added a significant return.
The covered call strategy likely led to a steady overall performance, combining the modest capital appreciation of XOM with the reliable income from the call premiums. This approach may have resulted in more stable returns for a conservative investor, particularly in a retirement account where preserving capital and generating income are primary goals.
Bottom Line
Using a covered call strategy with XOM in an IRA from 2018 to 2023 would have provided a combination of income generation through premiums and some capital appreciation. While this strategy limits upside potential, particularly in periods of strong price recovery, it offers additional income and slight downside protection, making it suitable for conservative investors, especially in retirement accounts.
To calculate the total premiums collected each year from selling covered calls on XOM every 6 weeks, we will first assume:
-
Premium per contract: From the example in the PDF, the premium for each contract (for 100 shares) was $1.50. This is the assumed average premium for each call option.
-
Shares held: The initial investment of $1,000,000 buys approximately 11,548 shares of XOM.
-
Contracts per round: Since each contract covers 100 shares, the number of contracts sold per round would be 11,548 ÷ 100 ≈ 115 contracts.
-
Frequency: Covered calls are sold every 6 weeks, so there would be about 8 cycles per year.
Given these assumptions, let’s calculate the total premium collected each year.
Formula:
-
Premium per cycle: Number of contracts × premium per contract × shares per contract.
-
Total premium for the year: Premium per cycle × number of cycles per year.
Premium Calculation for Each Year:
Step-by-Step Calculation:
-
Premium per cycle: [ \XOM Calls{Premium per cycle} = 115 \XOM Call Contracts{ contracts} \times 100 \XOM Covered Calls{ shares/contract} \times 1.50 \Call Premium{ premium/share} = $17,250 ]
-
Total premium per year (8 cycles per year): [ \XOM Call Strategy{Total premium/year} = 8 \times 17,250 = $138,000 ]
Estimated Total Premiums Collected Each Year:
Assuming a relatively stable premium over the years:
-
2018: $138,000
-
2019: $138,000
-
2020: $138,000
-
2021: $138,000
-
2022: $138,000
-
2023: $138,000
Summary of Total Premiums Collected:
| Year | Total Premium Collected |
|---|---|
| 2018 | $138,000 |
| 2019 | $138,000 |
| 2020 | $138,000 |
| 2021 | $138,000 |
| 2022 | $138,000 |
| 2023 | $138,000 |
Over the six-year period, the total premium collected would be $828,000 from the covered call strategy.
Covered Call Strategy Video Tutorial
-
Introduction to Covered Calls
-
Overview of XOM Covered Call Strategy
-
$1 Million Investment in XOM
-
January 2018 Example
-
Selling Covered Calls: The Process
-
Setting Strike Prices and Expiration Dates
-
Example: January 2018 Covered Call
-
Potential Outcomes of Covered Calls
-
Managing Premiums and Option Expiration
-
Repeating the Covered Call Process
-
Income Generation Through Premiums
-
Capital Appreciation vs. Capped Gains
-
Downside Protection with Premiums
-
Market Conditions: Bull and Bear Phases
-
Backtesting the XOM Covered Call Strategy (2018-2023)
XOM Covered Call Strategy Terms
-
Covered Call: An options strategy where an investor holds the underlying stock and sells call options on it.
-
Call Option: A contract that gives the buyer the right, but not the obligation, to buy the stock at a specified price before expiration.
-
Strike Price: The price at which the call option can be exercised.
-
Premium: The income received from selling a call option.
-
Expiration Date: The date when the option contract expires.
-
Out of the Money (OTM): A call option with a strike price above the current stock price.
-
In the Money (ITM): A call option with a strike price below the current stock price.
-
-
Assignment: When the call option seller is required to sell the underlying stock if the option is exercised.
-
Underlying Asset: The stock that the call option is written on.
-
Theta Decay: The reduction in an option’s value as it approaches its expiration date.
-
Implied Volatility: A measure of the market’s expectations for future price fluctuations.
-
Rolling: The process of closing an existing option position and opening a new one with a later expiration or different strike price.
-
Capped Upside: The limitation on potential gains due to the obligation to sell the stock at the strike price if the option is exercised.
-
Downside Protection: The cushion provided by the premium, reducing the effective cost basis of the underlying stock.
XOM Ex-Dividend Dates
ExxonMobil (XOM) dividends over the next 12 months based on their historical pattern and the most recent dividend data:
1. August 2024
-
Ex-Dividend Date: August 15, 2024
-
Record Date: August 15, 2024
-
Payment Date: September 10, 2024
-
Dividend Amount: $0.95 per share
2. November 2024
-
Expected Ex-Dividend Date: Approximately November 14, 2024
-
Expected Record Date: November 14, 2024
-
Expected Payment Date: December 10, 2024
-
Expected Dividend Amount: $0.95 per share (assuming no change)
3. February 2025
-
Expected Ex-Dividend Date: Approximately February 13, 2025
-
Expected Record Date: February 13, 2025
-
Expected Payment Date: March 10, 2025
-
Expected Dividend Amount: $0.95 per share (assuming no change)
4. May 2025
-
Expected Ex-Dividend Date: Approximately May 15, 2025
-
Expected Record Date: May 15, 2025
-
Expected Payment Date: June 10, 2025
-
Expected Dividend Amount: $0.95 per share (assuming no change)
5. August 2025
-
Expected Ex-Dividend Date: Approximately August 14, 2025
-
Expected Record Date: August 14, 2025
-
Expected Payment Date: September 10, 2025
-
Expected Dividend Amount: $0.95 per share (assuming no change)
Notes:
-
The exact ex-dividend and payment dates may vary slightly based on when ExxonMobil announces their dividends. These dates are based on the typical schedule they have followed in the past.
-
The dividend amount is based on the most recent payment. Any increases or special dividends would be announced by the company closer to the respective declaration dates.
ExxonMobil (XOM) is known for being a reliable dividend-paying stock, which is an important consideration when writing covered calls if we want to avoid having our shares called away before we collect the dividend. Here’s a breakdown of the key terms and dates we need to know:
1. Dividend Payment Schedule
-
Frequency: ExxonMobil pays dividends quarterly, typically in March, June, September, and December.
-
Consistency: XOM has a long history of consistent dividend payments, making it a popular choice for income-focused investors.
2. Important Dates
-
Declaration Date: This is when ExxonMobil’s Board of Directors announces the dividend amount and the upcoming key dates. It’s usually announced several weeks before the record date.
-
Ex-Dividend Date: This is the most critical date for our covered calls. The ex-dividend date is typically set one business day before the record date. To be eligible to receive the dividend, we must own the stock before the ex-dividend date. If we buy the stock on or after the ex-dividend date, we will not receive the dividend.
-
Record Date: This is the date on which the company checks its records to determine which shareholders are eligible to receive the dividend. Only those who are shareholders of record on this date will receive the dividend.
-
Payment Date: This is the date on which the dividend is actually paid out to shareholders.
3. Covered Calls and Dividends
-
Risk of Assignment: When we write a covered call, there is a risk that our shares could be called away if the stock price rises above the strike price of our option. If this happens before the ex-dividend date, we won’t receive the dividend because we won’t own the shares.
-
Strategies to Avoid Assignment:
-
Choose Strike Prices Wisely: Write covered calls with strike prices that are comfortably above the current stock price and that we believe the stock is unlikely to reach before the ex-dividend date.
-
Avoid Writing Calls Near Ex-Dividend Date: Consider avoiding writing covered calls as we approach the ex-dividend date, or choose expiration dates that fall after the ex-dividend date to minimize the risk of assignment.
-
Use Short-Dated Options: Writing shorter-duration calls (weekly options) can reduce the risk of assignment before the ex-dividend date.
-
4. Historical Patterns
ExxonMobil’s Dividend History: Monitoring XOM’s historical ex-dividend dates can help we anticipate when the next ex-dividend date might be, allowing we to plan our covered call writing strategy accordingly. Typically, the ex-dividend date is about two to three weeks before the dividend payment date.
By understanding these dates and strategically timing our covered call writing, we can minimize the risk of having our XOM shares called away before collecting dividends:
The most recent ex-dividend date for ExxonMobil (XOM) was August 15, 2024. To receive the next dividend payment, shareholders needed to own the stock before this date. The next dividend payment, which is $0.95 per share, is scheduled for September 10, 2024.
Given our strategy of writing covered calls and wanting to avoid having our shares called away, it’s crucial to note that options buyers are often motivated to exercise their calls just before the ex-dividend date if the option is in the money, so they can capture the dividend. To avoid this, we will avoid writing covered calls that expire around the ex-dividend date or we will choose a strike price well above the current stock price to reduce the likelihood of getting called away.
For future planning, ExxonMobil typically follows a consistent quarterly dividend schedule, so we can anticipate similar timing for ex-dividend dates in November 2024, February 2025, and beyond.
