Wednesday, January 27, 2010

Establish Intel Corp. Covered Calls

A new covered call position was established today in the Covered Calls Advisor Portfolio(CCAP) with Intel Corp.(INTC) as follows:

01/27/2010 Bought 300 INTC @ $20.03
01/27/2010 Sold 3 INTC Feb2010 $20.00 Call Options @ $.52

Intel Corp.(INTC) is the world's leading semiconductor producer and has been the industry leader since the inception of the personal computer. Intel produces products for many facets of advanced technology including flash memory products, motherboards, wired and wireless connectivity products and networked storage products. Its 2009 annual sales exceeded $35 billion and should approximate $40 billion this year. This sales increase coupled with an operating margin approaching 62% should enable Intel to achieve all-time record earnings per share approaching $2.00 in 2011. Applying a P/E of 15 against these earnings implies a reasonable target price potential of $30, which represents a very attractive 50% annualized return potential for the underlying stock.

Although the Covered Calls Advisor's "Buy Alerts" spreadsheet below shows that the total points of 19.79 is slightly below the desired threshold of 20 points, it was decided that the extraordinary earnings growth potential this year was sufficient to warrant a purchase commitment at this time.

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

The potential overall performance results(including commissions) for the INTC transactions would be as follows:
Stock Purchase Cost: $6,017.95
= ($20.03*300+$8.95 commission)

Net Profit:
(a) Options Income: +$144.80
= (300*$.52 - $11.20 commissions)
(b) Dividend Income: +$47.25 = Ex-dividend of $.1575 * 300 shares
(c) Capital Appreciation (If exercised at $20.00): -$17.95
= ($20.00-$20.03)*300 - $8.95 commissions

Total Net Profit(If stock exercised at $20.00): +$174.10
= (+$144.80 +$47.25 -$17.95)

Absolute Return if Exercised at $20.00: +2.9%
= +$174.10/$6,017.95
Annualized Return If Exercised (ARIE) +44.0%
= (+$174.10/$6,017.95)*(365/24 days)

The returns shown above are based on capturing Intel's $.1575 per share ex-dividend of 2/03/2010 and being assigned upon Feb2010 expiration. If the price of Intel increases significantly during the next week such that the call option owner exercises early to capture the dividend and the shares are called away on 2/2/2010, then the overall annualized returns would be substantially higher. Thus, and as is often the case, being assigned early would be a very desirable outcome for this Covered Calls Advisor position.