Today, the Covered Calls Advisor established a new Covered Calls position in Alibaba Group Holding Ltd. (ticker symbol BABA) with 26 days remaining until the October 20th, 2017 options expiration date. This position is a relatively conservative one since it was established today when the price of Alibaba was $169.05 (5.4% downside protection to the $160.00 strike price). This strike price is -0.68 standard deviations from the current stock price. Note: A recent research paper "Which Index Options Should You Sell?" by Israelov and Tummla determined that in the range of -0.5 to -0.7 standard deviations on average yielded the best alpha returns for us options sellers.
For Alibaba, the chart below (click on the chart to view a larger and more legible version) shows that the potential annualized return
of +18.4% for this Covered Calls position is preferable to the +16.8% to establish a comparable 100% Cash-Secured Puts position.
The implied volatility of the Call options was 30.3 when this position
was established and the open interest was 20,811 contracts
The downside 'breakeven price' at expiration is at $157.90 ($169.05 - $11.15),
which is 6.6% below the current market price of $169.05.
Using the Black-Scholes Options Pricing Model, the probability of
making a profit (if held until the October 20th, 2017 options expiration) for
this position is 76.1%. This compares with a
profit of 50.2% for a buy-and-hold of this Alibaba stock over the same
Using this probability of profit of 76.1%, the expected value for the annualized return-on-investment (if held until expiration) is +14.0% (+18.4% maximum potential annualized return on investment *
76.1%), an attractive risk/reward profile for this conservative investment.
'crossover price' at expiration is $180.20 ($169.05 + $11.15). This is the
price above which it would have been more profitable to simply
buy-and-hold Alibaba stock until the Oct. 20th options expiration date
rather than establishing this Covered Calls position.