Thursday, March 25, 2010

Establish InterDigital Inc. Covered Calls

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of InterDigital Inc.(IDCC) covered calls as follows:

Established InterDigital Inc.(IDCC) Covered Calls for Apr2010:
03/25/2010 Bought 200 IDCC @ $28.03
03/25/2010 Sold 2 IDCC Apr2010 $29.00 Calls @ $.50

InterDigital, Inc. designs and develops wireless digital technologies for use in 2G, 3G, and IEEE 802 related products. InterDigital now receives most of its revenue from royalties received from licenses and partnerships with semiconductor and mobile phone manufacturers. It currently has licenses covering 60% of 3G phones.

The Covered Calls Advisor established this position in InterDigital today upon completion of a thorough "Stock Selection Checklist" (See link) review. As shown in the Buy Alerts spreadsheet below, IDCC exceeds the Total Points threshold of 15.0 with a rating of 17.85. It is a high-growth company but with a very reasonable stock valuation. When first quarter earnings are announced in late April (note: a substantial increase in 1st quarter revenue guidance was recently announced), it is expected that based on the current price, the trailing twelve months P/E ratio will be below 10 -- which is substantially below IDCC's expected future growth rate.

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

InterDigital's CEO has a comprehensive and visionary view of how IDCC can participate the burgeoning mobile internet industry. It will be offering a suite of technologies in response to impending bandwith growth challenges with product offerings in each area of what it terms as "bigger pipes, more pipes, and better pipes." It is targeting opportunities beyond mobile phones in the areas of netbooks, mobile internet, machine-to-machine, and consumer electronics. The company is well-positioned to deliver on these worldwide opportunities based on their: (1) existing relationships with many of the worlds leading wireless companies; (2) existing 3,000+ patents; (3) large number of current patent applications; (4) in-house engineering expertise; and (5) newly formed high-quality Technical Advisory Council.

Due to the rapid rate of change in the telecomm sector, this should be considered as a speculative investment. But IDCC is definitely an under-the-radar situation. Despite its $1.2 billion market cap, it is now covered by only four small-firm analysts. This is likely to change if IDCC is successful with its business growth plans as well as with its commitment to soon implement all necessary steps to enhance its corporate governance process.

Some possible overall performance results(including commissions) for the IDCC transactions would be as follows:
Stock Purchase Cost: $5,614.95
= ($28.03*200+$8.95 commission)

Net Profit:
(a) Options Income: +$89.55
= (200*$.50 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $28.03):
-$8.95 = ($28.03-$28.03)*200 - $8.95 commissions
(c) Capital Appreciation (If exercised at $29.00): +$185.05
= ($29.00-$28.03)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $28.03): +$80.60
= (+$89.55 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $29.00): +$274.60
= (+$89.55 +$0.00 +$185.05)

Absolute Return if Unchanged at $28.03: +1.4%
= +$80.60/$5,614.95
Annualized Return If Unchanged (ARIU) +22.8%
= (+$80.60/$5,614.95)*(365/23 days)

Absolute Return if Exercised at $29.00: +4.9%
= +$274.60/$5,614.95
Annualized Return If Exercised (ARIE) +77.6%
= (+$274.60/$5,614.95)*(365/23 days)