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Saturday, January 20, 2018

January 19th, 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had eight positions with January 19th, 2018 options expirations.  All eight positions closed in-the-money, so the maximum potential return-on-investment result was achieved for every position: 
  • Alibaba Group Holding Ltd.:  +4.5% absolute return (+22.6% annualized return) in 72 days
  • Bristol-Myers Squibb Co.:  +1.3% absolute return (+26.6% annualized return) in 18 days
  • Gap Inc.: +2.2% absolute return (+34.1% annualized return) in 23 days
  • General Motors Co.:  +2.1% absolute return (+14.3% annualized return) in 54 days
  • iShares China Large-Cap ETF: +0.7% absolute return (+19.1% annualized return) in 13 days
  • JPMorgan Chase & Co.:  +1.2% absolute return (+17.9% annualized return) in 25 days
  • Las Vegas Sands Corp.:  +1.5% absolute return (+43.4% annualized return) in 13 days
  • Skyworks Solutions Inc.:  +2.6% absolute return (+21.5% annualized return) in 44 days
Two positions shown above (iShares China Large-Cap ETF and Las Vegas Sands) had early assignments (on the day prior to their ex-dividend date in each instance).  The remaining six Covered Calls positions expired in-the-money on their options expiration date yesterday.

The cash now available in the Covered Calls Advisor Portfolio from the closing of these positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  We have now entered earnings season and 4th quarter earnings reports have just begun.  Most companies will be reporting their results during the next three weeks, so we will be following these reports closely to identify Covered Calls positions to establish for next month's (Feb 16th, 2018) options expiration.  Given the stock market is at record highs and (1) overvalued by historic valuation metrics and (2) overbought by short-term metrics, the Covered Calls Advisor will be very cautious in investing the current mostly cash position in the Portfolio.  As always, any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

To demonstrate how return-on-investment results for closed Covered Calls positions are calculated, the details for the first position listed above (Alibaba Group Holding Ltd.) is provided here:


Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed
The transactions were as follows:
11/09/2017 Bought 300 shares of Alibaba stock @ $182.08 per share 
11/09/2017 Sold 3 Alibaba December 15th, 2017 $175.00 Call options @ $11.28 per share
Note: this was a simultaneous Buy/Write transaction
12/15/2017 3 Dec 15th, 2017 Call options expired
12/18/2017 Sold 3 BABA Jan 19th, 2018 $170.00 Call options @ $8.45 per share
Note: the price of Alibaba was $174.15 when these Calls were sold
01/19/2018 3 BABA Jan 19th, 2018 $170.00 Call options expired in-the-money, so 300 shares of BABA owned were sold at the $170.00 strike price, thus closing out this Covered Calls position.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $51,246.96
= ($182.08 - $11.28)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$5,912.04
= ($11.28 + $8.45) * 300 shares - $6.96 commission
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (BABA stock was sold at $170.00 strike price on Jan. 19th expiration date): -$3,628.95
= ($170.00 -$182.08)* 300 shares - $4.95 commission

Total Net Profit: +$2,283.09
= (+$5,912.04 options income +$0.00 dividend income -$3,628.95 capital appreciation)

Absolute Return: +4.5%
= +$2,283.09/$51,246.96
Equivalent Annualized Return: +22.6%
= (+$1,155.05/$51,246.96)*(365/72 days)

Your comments or questions related to this post or Covered Calls investing techniques are always welcomed.  To do so, click on the Comments link below.  Thank you.

Wednesday, January 17, 2018

Established Covered Calls Position in Alibaba Group Holding Ltd.

Today, a new Covered Calls positions was established in Alibaba Group Holding Ltd. with a February 16th, 2018 options expiration date.  This is the second Covered Calls position established for the Feb2018 expiration and a moderately conservative in-the-money position was established given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral and the uncertainty associated with an upcoming quarterly earnings report prior to the February expiration date.

The Covered Calls Advisor intended to continue the pattern of prior months by establishing Covered Calls positions in Alibaba.  There was no readily apparent reason for the $10 decline in the stock price during the past two days -- my best guess is that there is some institutional investors who (after the huge run-up in Alibaba in the past year) are paring back some of their holdings in Alibaba in order to re-balance their portfolios.  So, this advisor decided to take advantage of the current elevated implied volatility of 36.2 in these Call options when this position was established today and not to wait for the Alibaba Jan2018 options to expire before establishing this Feb2018 Covered Calls position.

As detailed below, a potential return-on-investment result is +2.2% absolute return in 31 days (equivalent to a +25.6% annualized return-on-investment).
Today's transactions and potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
The transactions were as follows:
01/17/2017 Bought 300 shares of Alibaba stock @ $180.09 per share 
01/17/2017 Sold 3 Alibaba February 16th, 2017 $170.00 Call options @ $13.73 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $49,914.96
= ($180.09 - $13.73)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$4,119.00
= ($13.723* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at Feb 16th expiration): -$3,031.95
= ($170.00 -$180.09)* 300 shares - $4.95 commission

Total Net Profit: +$1,087.05
= (+$4,119.00 options income +$0.00 dividend income -$3,031.95 capital appreciation)

Absolute Return: +2.2%
= +$1,087.05/$49,914.96
Equivalent Annualized Return: +25.6%
= (+$1,087.05/$49,914.96)*(365/31 days)

The downside 'breakeven price' at expiration is at $166.36 ($180.09 - $13.73), which is 7.6% below the current market price of $180.09.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the February 16th, 2017 options expiration) for this Alibaba Covered Calls position is 72.7%, so the expected value annualized ROI of this investment (if held until expiration) is +18.6% (+25.6% * 72.7%), a very nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $183.73 = $180.09 + [$13.73 - ($180.09 - $170.00)]. 
This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the February 16th, 2017 options expiration date rather than establishing this Covered Calls position.

Thursday, January 11, 2018

Established Covered Calls Position in Micron Technology Inc.

Today, a Covered Calls position was established in Micron Technology Inc. (ticker MU) for the February 16th, 2018 expiration and at the $40.00 strike price when the stock price was $42.65. This is the first Covered Calls position established with a Feb2018 options expiration.   Micron's stock has declined since its earnings report on December 19th when it was trading at $44 per share just prior to its earnings release. 

One of the Screeners developed by the Covered Calls Advisor called the 'QVG Model' (note: 'QVG' stands for Quality, Value, and Growth and uses a combination of factors in these categories.  Micron is one of the stocks that was identified by this screen.  Schwab Equity Ratings, Credit Suisse Research, and Argus give Micron their highest rating. In addition, 28 of 31 analysts tracked by Reuters have Buy or Outperform ratings on Micron.

As detailed below, a potential return-on-investment result is +3.15% absolute return (equivalent to +31.1% annualized return for the next 37 days) if the stock is assigned on the February 16th, 2018 options expiration date.


Micron Technology Inc. (MU) -- New Covered Calls Position

Call options liquidity is very good with 13,395 open interest contracts for the Feb 16th $40.00 Calls.

As shown in the chart below, a Covered Calls positions was chosen instead of its synthetically equivalent short 100% Cash-Secured Put options position in this instance since the annualized ROI potential is higher for the Covered Calls:
You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position".  Micron's next quarterly earnings report is after the February 16, 2018 options expiration date.
Also in the chart above is a column called "Intervening Ex-Div" and "NO" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  Micron does not currently pay a dividend, so the potential for applying a Dividend Capture Strategy is not relevant in this instance.

For this position, the downside 'breakeven price' at expiration is at $38.77 ($42.65 - $3.88), which is 9.1% below the current market price of $42.65. 

The 'crossover price' at expiration is $46.53 ($42.65 + $3.88).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until Feb 16th (the February monthly options expiration date) rather than establishing this Covered Calls position.

If you have any questions or comments to share, please click on the Comments link below.