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Saturday, August 26, 2017

Established New Covered Calls Position in Applied Materials Inc.

Yesterday was options expiration for August 25th.  Late in afternoon trading, it was apparent that the Covered Calls Advisor's Applied Materials (ticker AMAT) Aug 25th $43.00 Covered Calls position would close in-the-money and the position would be closed.  That did occur (Link).  The terrific returns were achieved because of the very high 45.2 implied volatility when the position was established; primarily because of the upcoming earnings report that occurred prior to the Aug 25th expiration.  AMAT's good earnings report helped maintain the AMAT stock price above the strike price until yesterday's expiration.  Despite the typical volatility crush (explanation of 'volatility crush') that occurs after the earnings report (from 45.2 to 25.6 in this case), the potential return-on-investment for a new position was still attractive enough (an absolute return of  +2.1% which is equivalent to +35.1% annualized return over the next 22 days) to warrant establishing another Covered Calls investment in Applied Materials.


Applied Materials Inc. -- New Covered Calls Position Established
The transactions were:
08/25/2017 Bought 500 AMAT shares @ $43.38
08/25/2017 Sold 5 AMAT Sept 15, 2017 $43.00 Call options @ $1.28
Note: a simultaneous buy/write transaction was executed.

A possible overall performance result (including commissions) for this Applied Materials covered calls position is as follows:
Covered Calls Position Cost Basis: $21,058.30
= ($43.38 stock price -$1.28 options price) *500 shares +$8.30 commissions

Net Profit:
(a) Options Income: +$640.00
= ($1.28*500 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AMAT assigned at $43.00 strike price at Sept 15th options expiration): -$194.95
= ($43.00-$43.38)*500 shares - $4.95 commissions

Total Net Profit (If AMAT assigned at $43.00 at options expiration): +$445.05
= (+$640.00 options income +$0.00 dividend income -$194.95 capital appreciation)

Absolute Return: +2.1%
= +$445.05/$21,058.30
Annualized Return: +35.1%
= (+$445.05/$21,058.30)*(365/22 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 $42.10 ($43.38 -$1.28) provides 3.0% downside protection.

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