Thursday, October 22, 2009

Establish Amgen Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Amgen Inc (AMGN) covered calls as follows:

Established Amgen Inc.(AMGN) Covered Calls for Nov09:
10/22/09 Bought 200 AMGN @ $56.40
10/22/09 Sold 2 AMGN Nov09 $57.50 Calls @ $1.20

Amgen Inc. is one of the world's largest biotechnology companies. It engages in the discovery, development, manufacture, and marketing of human therapeutics based on advances in cellular and molecular biology. The company markets human therapeutic products primarily in the areas of supportive cancer care, nephrology, and inflammation. Its principal products include Aranesp and EPOGEN that stimulate the production of red blood cells to treat anemia; Neulasta and NEUPOGEN, which selectively stimulate the production of neutrophils, a type of white blood cell that helps the body fight infections; and ENBREL that blocks the biologic activity of tumor necrosis factor by inhibiting TNF, a substance induced in response to inflammatory and immunological responses, such as rheumatoid arthritis and psoriasis. The company has a joint venture with Kirin Holdings Company, Limited to manufacture and market darbepoetin alfa; a co-promotion agreement with Wyeth for marketing and selling of ENBREL; and Johnson & Johnson to commercialize recombinant human erythropoietin as a human therapeutic. It markets its products to healthcare providers, including physicians or their clinics, dialysis centers, hospitals, and pharmacies primarily in the United States, Europe, and Canada. The company was founded in 1980 and is based in Thousand Oaks, California.

Yesterday, Amgen released 3rd quarter earnings that substantially exceeded analysts' expectations. But today the stock is selling off dramatically over concerns raised from a post-hoc subset analysis of the TREAT trial of Aranesp in kidney disease. This advisor believes that the stock sell-off today is overblown. In addition, there are potentially positive short-term catalysts from: (1) The full TREAT data at the American Society of Nephrology meeting on October 30th; and (2) PDUFA (Prescription Drug User Fee Act) for denosumab(dmab) for its FDA application for osteoporosis and also dmab Phase III data for prostate cancer. On a basic P/E analysis basis, the current year P/E of 11.3 ($56.40/$5.00 EPS est.) is relatively low both historically and relative to other companies with similar growth potential.

Below is the Covered Calls Advisor's 'Buy Alerts' spreadsheet for AMGN. It scored slightly below the desired threshold of 20.0 with a Total Points rating of 19.76. However, this advisor's conviction that today's sell-off is excessive provided sufficient impetus for establishing this position today.

Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for the AMGN transactions would be as follows:
Stock Purchase Cost: $11,288.95
= ($56.40*200+$8.95 commission)

Net Profit:
(a) Options Income: +$229.55
= (200*$1.20 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $56.40): -$8.95
= ($56.40-$56.40)*200 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $57.50): +$211.05
= ($57.50-$56.40)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $56.40): +$220.60
= (+$229.55 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $57.50): +$440.60
= (+$229.55 +$0.00 +$211.05)

Absolute Return if Stock Price Unchanged at $56.40: +2.0%
= +$220.60/$11,288.95
Annualized Return If Unchanged (ARIU): +23.8%
= (+$220.60/$11,288.95)*(365/30 days)

Absolute Return if Stock Exercised at $57.50: +3.9%
= +$440.60/$11,288.95
Annualized Return If Exercised (ARIE): +47.5%
= (+$440.60/$11,288.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $55.20 ($56.40-$1.20), and as such provides a downside profit protection of up to 2.0% below the purchase price.