Wednesday, February 23, 2011

Establish China Mobile Ltd ADR Covered Calls

A new covered call position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of China Mobile Ltd ADR (CHL) covered calls. China Mobile is by far the world's largest mobile telecommunications service provider with over 589 million subscribers in China, and it continues to experience significant growth. To put their size in perspective, this is almost twice the total U.S. population as well as approximately three times the total number of wireless subscribers of both Verizon Wireless and AT&T combined.

The transactions were as follows:
02/23/2011 Bought 200 CHL @ $46.479
02/23/2011 Sold 2 CHL Mar2011 $47.50 Calls @ $.60

Because CHL continues rates very highly on the CCAP 'Buy Alerts' spreadsheet (See below that Total Points of 17.36 is above this advisor's required threshold of 16.0), it was decided to establish a covered calls position in CHL with a Mar2011 expiration.

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

Two possible overall performance results(including commissions) for the China Mobile Ltd ADR (CHL) transactions would be as follows:

Stock Purchase Cost: $9,304.75
= ($46.479*200+$8.95 commission)

Net Profit:
(a) Options Income: +$109.55
= ($.60*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $46.479): -$8.95
= ($46.479-$46.479)*200 - $8.95 commissions
(c) Capital Appreciation (If CHL above $47.50 at Mar2011 expiration): +$195.25
+($47.50-$46.479)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $46.479): +$100.60
= (+$109.55 +$0.00 -$8.95)
Total Net Profit(If stock price above $47.50 at Mar2011 options expiration): +$304.80= (+$109.55 +$0.00 +$195.25)

Absolute Return if Unchanged at $46.479: +1.1%
= +$100.60/$9,304.75
Annualized Return If Unchanged (ARIU): +17.2%
= (+$470.60/$22,000.00)*(365/23 days)

Absolute Return (If stock price above $47.50 at Mar2011 options expiration): +3.3%
= +$304.80/$9,304.75
Annualized Return (If stock price above $47.50 at expiration): +52.0%
= (+$304.80/$9,304.75)*(365/23 days)

The downside breakeven price at expiration is at $45.879 ($46.479 - $.60).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Mar2011 options expiration) for this China Mobile Ltd ADR (CHL) covered calls position is 58.6%. This compares with a probability of profit of 49.3% for a buy-and-hold of China Mobile (CHL) over the same time period.