Monday, August 21, 2017

Established Covered Calls Positions in Micron Technology Inc. and Voya Financial Inc.

Today, two new Covered Calls positions were established in Micron Technology Inc. and Voya Financial Inc.(ticker VOYA).  The Micron position was established when the stock price was $29.71 and the September 15th, 2017 $28.00 Calls were sold at $2.29.   The Voya stock was purchased at $36.94 and the Sept 15th $36.00 Calls were sold at $1.54.   Both positions are relatively conservative since the Covered Calls Advisor's current Overall Market Meter sentiment is Neutral -- Micron has 5.8% downside protection to the strike price and Voya has 2.5%.

As detailed below, the potential returns are:
  • Micron Technology Inc. -- +2.1% absolute return in 26 days (equivalent to a +29.3% annualized return-on-investment). 
  • Voya Financial Inc. -- +1.7% absolute return in 26 days (equivalent to a +23.5% annualized return-on-investment). 
  • Both of these positions exceed the Covered Calls Advisor's desired threshold of >20% returns.


    1. Micron Technology Inc. (MU) -- New Covered Calls Position
    The implied volatility of the Call options was 40.3 when this position was established.    

    The transactions were as follows:
    08/21/2017 Bought 600 shares of Micron @ $29.71 
    08/21/2017 Sold 6 MU Sept 15, 2017 $28.00 Call options @ $2.29
    Note: this was a simultaneous Buy/Write transaction


    A possible overall performance result (including commissions) would be as follows:
    Cost Basis: $16,460.97
    = ($29.71 - $2.29)* 600 shares + $8.97 commission

    Net Profit:
    (a) Options Income: +$1,374.00
    = ($2.29* 600 shares)
    (b) Dividend Income: +$0.00 
    (c) Capital Appreciation (If Micron is above $28.00 strike price at Sept 15th expiration): -$1,030.95
    = ($28.00-$29.71)* 600 shares - $4.95 commission

    Total Net Profit (If MU stock price is above $28.00 strike price at Sept 15th options expiration): +$343.05
    = (+$1,374.00 options income +$0.00 dividend income -$1,030.95 capital appreciation)

    Absolute Return: +2.1%
    = +$343.05/$16,460.97
    Annualized Return: +29.3%
    = (+$343.05/$16,460.97)*(365/26 days)

    The downside 'breakeven price' at expiration is at $27.42 ($29.71 - $2.29), which is 7.7% below the current market price of $29.71.

    The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Micron Technology Covered Calls position is 72.6%. This compares with a probability of profit of 50.2% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 72.6%, the expected value annualized return-on-investment (if held until expiration) is +21.3% (+29.3% * 72.6%), a satisfactory risk/reward profile for this relatively conservative investment.  

    The 'crossover price' at expiration is $32.00 ($29.71 + $2.29).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the Sept 15th, 2017 options expiration date.


     
    2. Voya Financial Inc. (VOYA) -- New Covered Calls Position
    The implied volatility of the Call options was 23.9 when this position was established; so the $1.54 per share received is a nice premium received for these in-the-money (i.e. strike price below the current stock price) Call options.    

    The transactions were as follows:
    08/21/2017 Bought 300 shares VOYA @ $36.94 
    08/21/2017 Sold 3 VOYA Sept 15, 2017 $36.00 Call options @ $1.54
    Note: this was a simultaneous Buy/Write transaction
    08/29/2017 Upcoming $.01 per share ex-dividend

    A possible overall performance result (including commissions) would be as follows:
    Cost Basis: $10,626.96
    = ($36.94 - $1.54)*300 shares + $6.96 commission

    Net Profit:
    (a) Options Income: +$462.00
    = ($1.54*300 shares)
    (b) Dividend Income: +$3.00 = $.01 dividend x 300 shares 
    (c) Capital Appreciation (If VOYA is above $36.00 strike price at Sept 15th expiration): -$286.95
    = ($36.00-$36.94)*300 shares - $4.95 commission

    Total Net Profit (If VOYA stock price is above $36.00 strike price at Sept 15th options expiration): +$178.05
    = (+$462.00 options income +$3.00 dividend income -$286.95 capital appreciation)

    Absolute Return: +1.7%
    = +$178.05/$10,626.96
    Annualized Return: +24.2%
    = (+$178.05/$10,626.96)*(365/26 days)

    The downside 'breakeven price' at expiration is at $35.41 ($36.96 - $.01 - $1.54), which is 4.1% below the current market price of $36.94.

    The probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Voya Covered Calls position is 66.4%. This compares with a probability of profit of 50.3% for a buy-and-hold of VOYA shares over the same time period. Using this probability of profit of 66.4%, the expected value annualized return-on-investment (if held until expiration) is +16.1% (+24.2% * 66.4%), a satisfactory risk/reward profile for this relatively conservative investment.  

    The 'crossover price' at expiration is $38.47 ($36.94 - $.01 + $1.54).  This is the price above which it would have been more profitable to simply buy-and-hold Voya stock until the Sept 15th, 2017 options expiration date instead of holding this Covered Calls position.

Sunday, August 20, 2017

August 2017 Options Expiration Results

The Covered Calls Advisor Portfolio had seven positions with August 18, 2017 options expirations.  One position (Intel) had an early assignment on the day prior to the ex-dividend date and the results from that position were described here: Link

Of the total seven positions, the remaining six were held until Friday's August 18th expiration.  Of these, three positions (Alibaba Group Holding Ltd., Express Scripts Holding Co., and Micron Technology Inc.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions:
  • Alibaba Group Holding Ltd.:  +1.2% absolute return (+26.3% annualized return) in 17 days
  • Express Scripts Holding Co.:  +1.0% absolute return (+15.5% annualized return) in 23 days  
  • Micron Technology Inc.+2.5% absolute return (+41.7% annualized return) in 22 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these three positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

The remaining three positions (Delta Air Lines Inc., Devon Energy Corp., and Range Resources Corp.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see holdings in right sidebar) until either the stock is sold or a continuation covered calls position is established. 

The details for each of the closed positions is as follows:

1.  Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed 
The transactions were as follows:
08/02/2017  Bought 200 Alibaba shares @ $150.61
08/02/2017 Sold 2 BABA August 18, 2017 $140.00 Call options @ $12.33
Note: this was a simultaneous Buy/Write transaction
08/18/2017 200 BABA shares sold at $140 strike price at Aug 18th options expiration  

The overall performance result (including commissions) was as follows:
Cost Basis: $27,662.29
= ($150.61 -$12.33) * 200 shares + $6.29 commission

Net Profit:
(a) Options Income: +$2,466.00
= ($12.33 *200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA was above $140.00 strike price at August 18, 2017 expiration): -$2,126.95
= ($140.00-$150.61)*200 shares - $4.95

Total Net Profit: +$339.05
= (+$2,466.00 options income +$0.00 dividend income -$2,126.95 capital appreciation)

Absolute Return: +1.2%
= +$339.05/$27,662.29
Annualized Return: +26.3%
= (+$339.05/$27,662.29)*(365/17 days)


2. Express Scripts Holding Co. (ESRX) -- Covered Calls Position Closed
The transactions were as follows:
07/27/2017  Bought 400 Express Scripts Holding Co. shares @ $62.47
07/27/2017 Sold 4 ESRX Aug 18, 2017 $60.00 Call options @ $3.07
Note: this was a simultaneous buy/write transaction.
08/18/2017 400 ESRX shares sold at $60.00 strike price at Aug 18th options expiration

The overall performance result (including commissions) was as follows:
Cost Basis: $23,767.55
= ($62.47 - $3.07) *400 shares + $7.55 commissions

Net Profit:
(a) Options Income: +$1,225.32
= ($3.07*400 shares) - $2.68 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (ESRX is above $60.00 strike price at Aug 18th expiration): -$992.95
= ($60.00-$62.47)*400 shares - $4.95 commissions

Total Net Profit (ESRX was above $60.00 strike price at Aug 18, 2017 options expiration): +$232.37
= (+$1,225.32 options income +$0.00 dividends -$992.95 capital appreciation)

Absolute Return: +1.0%
= +$232.37/$23,767.55
Annualized Return: +15.5%
= (+$232.37/$23,767.55)*(365/23 days)


3. Micron Technology Inc. (MU) -- 100% Cash-Secured Put Options Position Closed
The transactions were as follows:
07/28/2017  Sold 10 MU Aug 18, 2017 $28.00 100% cash-secured Put options @ $.71
Note: the price of Micron's stock was $29.15 today when this transaction was executed.
08/18/2017 10 MU Put options expired since price of stock was above strike price on the 8/18/2017 expiration date

The Covered Calls Advisor does not use margin, so the detailed information on this position and the result shown below reflect the fact that this position was established using 100% cash securitization for the ten Put options sold.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 shares + $4.95 commission

Net Profit:
(a) Options Income: +$703.30
= ($.71*1,000 shares) - $6.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Micron Technology Inc. was above $28.00 strike price at August 18th expiration): +$0.00
= ($28.00-$28.00)*1,000 shares

Total Net Profit: +$703.30
= (+$703.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +2.5%
= +$703.30/$28,004.95
Annualized Return: +41.7%
= (+$703.30/$28,004.95)*(365/22 days)

Thursday, August 17, 2017

Established Covered Calls in Applied Materials Inc.

Today, a covered calls position was established in Applied Materials Inc. (ticker symbol AMAT) with an August 25, 2017 expiration and at the $43.00 strike price.  This position has an upcoming quarterly ex-dividend on August 22nd of $.10 per share, so the potential return-on-investment result at expiration includes this dividend.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is an absolute return of  +2.5% which is equivalent to +100.3% annualized return over the next 9 days) if the stock is assigned on the August 25, 2017 options expiration date.
Applied Materials did report quarterly earnings after market close today.  I decided to go forward and establish this position because: (1) AMAT's four largest semiconductor equipment competitors (ASML, LRCX, KLAC, and TER) have already reported earnings and they each soundly beat analysts' EPS expectations (by from 2.8% to 8.0%), so I expected AMAT to do the same; and (2) the implied volatility had expanded to a very high 45.2 which is much higher than the Covered Calls Advisor would have expected for a company that is so closely covered by so many analysts (21 at present) and for which the expected EPS range was relatively narrow at $.82 - $.86.  Here's a short news summary related to Applied Materials' earnings report today:

Applied Materials Posts Better-than-Expected Q3 Results, Q4 Guidance                                      
04:04 PM EDT, 08/17/2017 (MT Newswires) -- Applied Materials (AMAT) reported Q3 revenue of $3.74 billion, up 33% year-over-year and ahead of the analyst consensus of $3.68 billion on Capital IQ. Earnings were $0.86 per share, up 72% year-over-year and topping the Street view of $0.83 per share.
For Q4, the company expects sales in the range of $3.85-$4.0 billion, vs. the analyst consensus of $3.71 billion. Non-GAAP earnings are seen at $0.86-$0.94 per share, vs. expectations for $0.82 per share.

AMAT shares are up more than 3% on 1.1 million shares in aftermarket trading as of 5:00pm today.

Details for this position as well as a possible return-on-investment outcome is provided below.

Applied Materials Inc. -- Covered Calls Position Established
The transactions were:
08/17/2017 Bought 500 AMAT shares @ $43.60
08/17/2017 Sold 5 AMAT Aug 25, 2017 $43.00 Call options @ $1.55
Note: a simultaneous buy/write transaction was executed.
08/22/2017 Upcoming quarterly ex-dividend of $.10 per share

A possible overall performance result (including commissions) for this Applied Materials covered calls position is as follows:
Covered Calls Position Cost Basis: $21,033.30
= ($43.60 stock price -$1.55 options price) *500 shares +$8.30 commissions

Net Profit:
(a) Options Income: +$775.00
= ($1.55*500 shares)
(b) Dividend Income (If AMAT assigned at Aug 25th, 2017 expiration): +$50.00
= ($.10 dividend per share x 500 shares)
(c) Capital Appreciation (If AMAT assigned at $43.00 strike price at Aug 25th options expiration): -$304.95
= ($43.00-$43.60)*500 shares - $4.95 commissions

Total Net Profit (If AMAT assigned at $43.00 at options expiration): +$520.05
= (+$775.00 options income +$50.00 dividend income -$304.95 capital appreciation)

Absolute Return (If AMAT assigned at $43.00 on August 25, 2017 expiration date): +2.5%
= +$520.05/$21,033.30
Annualized Return (If AMAT assigned at $43.00 on August 25th options expiration date): +100.3%
= (+$520.05/$21,033.30)*(365/9 days)

These returns will be achieved as long as the stock is above the $43.00 strike price at expiration.  If the stock declines below the strike price, the breakeven price of $41.95 ($43.60 -$1.55 -$.10) provides 3.8% downside protection below today's $43.60 purchase price.

Established Covered Calls Position in Kohl's Corporation

Today, a covered calls position was established in Kohl's Corporation (ticker symbol KSS) with a September 15, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $35.00 moderately below the stock purchase price of $37.02. 

There is potential for a +3.0% absolute return in 30 days (equivalent to a +36.7% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment.  An upcoming ex-dividend of $.55 per share will occur on September 1st, so this dividend is included in the potential return-on-investment result detailed below.

The stock price of all big box retailers, including Kohl's, declined today in sympathy with the decline in Walmart stock after it reported decent (but not inspiring) quarterly earnings this morning.  The Covered Calls Advisor believes that Kohl's current valuation relative to its primary competitors is now very attractive:
       



Given this relatively attractive valuation along with Kohl's upcoming generous dividend and attractive options premiums (current implied volatility of 31.0), the Covered Calls Advisor decided to establish the Covered Calls position described below.  It is also noted that Kohl's already reported their earnings last week, so there will be no earnings report surprises prior to the options expiration date.





Kohl's Corporation (KSS) -- New Covered Calls Position
The transactions were as follows:
08/17/2017  Bought 500 Kohl's shares @ $37.02
08/17/2017 Sold 5 KSS Sept 15, 2017 $35.00 Call options @ $2.52
Note: this was a simultaneous buy/write transaction.
09/01/2017 $.55 ex-dividend

A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares KSS: $17,258.30
= ($37.02 -$2.52)*500 + $8.30 commissions

Net Profit:
(a) Options Income: +$1,260.00
= ($2.52*500 shares)
(b) Dividend Income: +$275.00
= $.55 per share x 500 shares
(c) Capital Appreciation (If KSS is above $35.00 strike price at Sept 15th expiration): -$1,014.95
= ($35.00-$37.02)*500 shares - $4.95 commissions

Total Net Profit (If KSS is above $35.00 strike price at Sept 15, 2017 options expiration): +$520.05
= (+$1,260.00 options income +$275.00 dividends -$1,014.95 capital appreciation)

Absolute Return: +3.0%
= +$520.05/$17,258.30
Annualized Return: +36.7%
= (+$520.05/$17,258.30)*(365/30 days)

The downside 'breakeven price' at expiration is at $33.95 ($37.02 - $2.52 -$.55), which is 8.3% below the current market price of $37.02. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the Sept 15th, 2017 options expiration) for this Kohl's Corporation covered calls position is 70.6%, so the expected value annualized ROI of this investment (if held until expiration) is +25.9% (+36.7% * 70.6%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $38.99 ($37.02 + $2.52 -$.55).  This is the price above which it would have been more profitable to simply buy-and-hold Kohl's stock until September 15th (the September monthly options expiration date) rather than establishing this covered calls position.