As detailed below, the Alibaba Group Holding Ltd. investment will yield a +0.8% absolute return in 8 days (which is equivalent to a +36.6% annualized return-on-investment) if Alibaba stock closes above the $90.00 strike price on the Nov 18th options expiration date.
Today was Alibaba's annual Singles Day, and they transacted an incredible $17.73 billion (yes that's Billion -- with a B), an increase of 24% above the same day last year.
The Covered Calls Advisor does not use margin, so the detailed information on this position and these results shown below reflect that this position was established using 100% cash securitization for the two Put options sold.
The implied volatility in the options was 35 when this position was established; so the $.77 price per share received when the Puts were sold is a nice premium to receive for us option sellers.
The transaction was as follows:
11/11/2016 Sold 2 BABA 100% cash-secured $90.00 Put options with Nov2016 expirations @ $.77
Note: the price of Alibaba was $92.74 today when this transaction was executed.
A potential performance result (including commissions) could be as follows:
100% Cash-Secured Cost Basis: $18,000.00
(a) Options Income: +$144.55
= ($.77 * 200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA closes above $90.00 strike price at Nov2016 expiration): +$0.00
= ($90.00 -$90.00)*200 shares
Total Net Profit: +$144.55
= (+$144.55 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return: +0.8%
Annualized Return: +36.6%
= (+$144.55/$18,000.00)*(365/8 days)
The downside 'breakeven price' at expiration is at $89.23 ($90.00 - $.77), which is 3.8% below the current market price of $92.74.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Nov 18th, 2016 options expiration) for this Alibaba short Puts position is 72%. This compares with a probability of profit of 50.0% for a buy-and-hold of this Alibaba stock over the same time period. Using this probability of profit of 74%, the expected value annualized return-on-investment (if held until expiration) is +26.4% (+36.6% maximum potential annualized return on investment * 72%), an attractive risk/reward profile for this somewhat conservative investment.
The 'crossover price' at expiration is $93.51 ($92.74 + $.77). This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Nov2016 options expiration date rather than selling these Put options.