Thursday, October 22, 2009

Establish Multi-Fineline Electronix Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Multi-Fineline Electronix Inc.(MFLX) covered calls. The new position established today was as follows:

Established Multi-Fineline Electronix Inc.(MFLX) Covered Calls for Nov09:
10/22/09 Bought 400 MFLX @ $27.50
10/22/09 Sold 4 MFLX Nov09 $30.00 Calls @ $.80

Multi-Fineline Electronix, Inc.(MFLX) is a small company in the global electronic manufacturing services (EMS) industry, but a mid-tier player among producers of flexible printed circuit boards. The company's products are used in mobile phones, smart mobile devices, consumer products, portable bar code scanners, personal digital assistants, computer/storage devices, and medical devices. MFLX's technology niche relative to other producers is in applications requiring specified shapes, sizes, weights and functionality of wireless handsets. For example, flip-phones are a product of the flexibility of these circuit boards, and would otherwise be impractical with rigid circuit boards.

MFLX has manufacturing operations in the U.S. focused on design and application, and in China (2 plants) and Malaysia (soon opening a new plant) primarily for high-volume and cost-efficient manufacturing. Its customer base is somewhat concentrated in that Sony Ericsson, Motorola, Apple, and Rimm comprise over 90% of its sales. But relations with these customers seems strong and MFLX is now working closely with a potential fifth major Asian-based customer. Multi-Fineline Electronix is well positioned to benefit from what Jim Cramer refers to as the current "mobile internet tsunami". In their most recent quarterly earnings conference call, the CEO indicated that they were "pursuing both organic growth and new customers".
MFLX is based in Anaheim, CA, however currently approximately 91% of product sales are outside of the U.S. WBL Corporation Limited owns approximately 59% of MFLX.

In establishing this covered calls position, added uncertainty results from the quarterly earnings report scheduled for October 8th. However, this advisor was encouraged by the recent excellent quarterly report from Intel, a bellwether company in the semiconductor electronic components industry. As a result, the more bullish out-of-the-money position was established in this instance.

As shown below, MFLX ranks highly on the Covered Calls Advisor 'Buy Alerts' worksheet with a 'Total Points' rating of 22.63, well above the desired threshold of 20.0 points.

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

Some possible overall performance results(including commissions) for the MFLX transactions would be as follows:
Stock Purchase Cost: $11,008.95
= ($27.50*400+$8.95 commission)

Net Profit:
(a) Options Income: +$308.05
= (400*$.80 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $27.50): -$8.95
= ($27.50-$27.50)*400 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $30.00): +$991.05
= ($30.00-$27.50)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $27.50): +$299.10
= (+$308.05 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $30.00): +$1,299.10
= (+$308.05 +$0.00 +$991.05)

Absolute Return if Stock Price Unchanged at $27.50: +2.7%
= +$299.10/$11,008.95
Annualized Return If Unchanged (ARIU): +33.1%
= (+$299.10/$11,008.95)*(365/30 days)

Absolute Return if Stock Exercised at $30.00: +11.8%
= +$1,299.10/$11,008.95
Annualized Return If Exercised (ARIE): +143.6%
= (+$1,299.10/$11,008.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $26.70 ($27.50-$.80) which provides a downside profit protection of up to 2.9% below the purchase price.