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Wednesday, October 20, 2010

Establish Intel Corp. Covered Calls

This past Friday was options expiration for Oct2010. An Oct2010 covered calls position in Intel Corp.(INTC) was in the money at expiration, so the stock was called away for a small profit. Since the fundamental valuation (as shown on the Buy Alerts spreadsheet below) remains strong for Intel, a new covered calls position was established today as follows:

10/20/2010 Bought 300 INTC @ $19.45
10/20/2010 Sold 3 INTC Nov2010 $20.00 Call Options @ $.21

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 above 60% should enable Intel to achieve all-time record earnings per share of approximately $2.00 this year. Applying a P/E of 13 (historically low for Intel) against these earnings implies a very reasonable target price potential of $26, which represents an attractive 34% annualized return potential for the underlying stock over the next year.

The Covered Calls Advisor's "Buy Alerts" spreadsheet below shows that the total points of 16.42 is above the desired threshold of 16 points for a new investment.

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

Two possible overall performance results(including commissions) for the INTC transactions would be as follows:
Stock Purchase Cost: $5,843.95
= ($19.45*300+$8.95 commission)

Net Profit:
(a) Options Income: +$51.80
= 300*$.21 - $11.20 commissions
(b) Dividend Income: +$47.25 = ($.1575*300 shares) ex-div on 11/3/2010
(c) Capital Appreciation (If stock price unchanged at $19.45):
-$8.95 = ($19.45-$19.45)*300 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $20.00): +$156.05
= ($20.00-$19.45)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $19.45): +$90.10
= (+$51.80 +$47.25 -$8.95)
Total Net Profit(If stock price assigned at $20.00): +$255.10
= (+$51.80 +$47.25 +$156.05)

Absolute Return if Unchanged at $19.45: +1.5%
= +$90.10/$5,843.95
Annualized Return If Unchanged (ARIU) +18.2%
= (+$90.10/$5,843.95)*(365/31 days)

Absolute Return if Assigned at $20.00: +4.4%
= +$255.10/$6,098.95
Annualized Return If Assigned (ARIA) +51.4%
= (+$255.10/$6,098.95)*(365/31 days)

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