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Thursday, August 17, 2017

Established Covered Calls in Applied Materials Inc.

Today, a covered calls position was established in Applied Materials Inc. (ticker symbol AMAT) with an August 25, 2017 expiration and at the $43.00 strike price.  This position has an upcoming quarterly ex-dividend on August 22nd of $.10 per share, so the potential return-on-investment result at expiration includes this dividend.  Given the Covered Calls Advisor's current overall market outlook, an in-the-money covered calls position was established. 

As detailed below, a potential return-on-investment result is an absolute return of  +2.5% which is equivalent to +100.3% annualized return over the next 9 days) if the stock is assigned on the August 25, 2017 options expiration date.
Applied Materials did report quarterly earnings after market close today.  I decided to go forward and establish this position because: (1) AMAT's four largest semiconductor equipment competitors (ASML, LRCX, KLAC, and TER) have already reported earnings and they each soundly beat analysts' EPS expectations (by from 2.8% to 8.0%), so I expected AMAT to do the same; and (2) the implied volatility had expanded to a very high 45.2 which is much higher than the Covered Calls Advisor would have expected for a company that is so closely covered by so many analysts (21 at present) and for which the expected EPS range was relatively narrow at $.82 - $.86.  Here's a short news summary related to Applied Materials' earnings report today:

Applied Materials Posts Better-than-Expected Q3 Results, Q4 Guidance                                      
04:04 PM EDT, 08/17/2017 (MT Newswires) -- Applied Materials (AMAT) reported Q3 revenue of $3.74 billion, up 33% year-over-year and ahead of the analyst consensus of $3.68 billion on Capital IQ. Earnings were $0.86 per share, up 72% year-over-year and topping the Street view of $0.83 per share.
For Q4, the company expects sales in the range of $3.85-$4.0 billion, vs. the analyst consensus of $3.71 billion. Non-GAAP earnings are seen at $0.86-$0.94 per share, vs. expectations for $0.82 per share.

AMAT shares are up more than 3% on 1.1 million shares in aftermarket trading as of 5:00pm today.

Details for this position as well as a possible return-on-investment outcome is provided below.

Applied Materials Inc. -- Covered Calls Position Established
The transactions were:
08/17/2017 Bought 500 AMAT shares @ $43.60
08/17/2017 Sold 5 AMAT Aug 25, 2017 $43.00 Call options @ $1.55
Note: a simultaneous buy/write transaction was executed.
08/22/2017 Upcoming quarterly ex-dividend of $.10 per share

A possible overall performance result (including commissions) for this Applied Materials covered calls position is as follows:
Covered Calls Position Cost Basis: $21,033.30
= ($43.60 stock price -$1.55 options price) *500 shares +$8.30 commissions

Net Profit:
(a) Options Income: +$775.00
= ($1.55*500 shares)
(b) Dividend Income (If AMAT assigned at Aug 25th, 2017 expiration): +$50.00
= ($.10 dividend per share x 500 shares)
(c) Capital Appreciation (If AMAT assigned at $43.00 strike price at Aug 25th options expiration): -$304.95
= ($43.00-$43.60)*500 shares - $4.95 commissions

Total Net Profit (If AMAT assigned at $43.00 at options expiration): +$520.05
= (+$775.00 options income +$50.00 dividend income -$304.95 capital appreciation)

Absolute Return (If AMAT assigned at $43.00 on August 25, 2017 expiration date): +2.5%
= +$520.05/$21,033.30
Annualized Return (If AMAT assigned at $43.00 on August 25th options expiration date): +100.3%
= (+$520.05/$21,033.30)*(365/9 days)

These returns will be achieved as long as the stock is above the $43.00 strike price at expiration.  If the stock declines below the strike price, the breakeven price of $41.95 ($43.60 -$1.55 -$.10) provides 3.8% downside protection below today's $43.60 purchase price.

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