Search This Blog

Monday, October 23, 2017

Covered Calls Established in Alibaba Group Holding Ltd. and Citigroup Inc.

Today, two new Covered Calls positions were entered in Alibaba Group Holding Ltd. (ticker BABA) and Citigroup Inc. (ticker C).   Both positions were established for the November 17th, 2017 options expiration date and given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, in-the-money positions were taken.

As detailed below, the potential return-on-investments are:
  • Alibaba Group:  A +2.2% absolute return in 26 days (equivalent to a +31.2% annualized return-on-investment); and
  • Citigroup Inc.:  A +1.4% absolute return in 26 days (equivalent to a +19.9% annualized return-on-investment) 
The transactions and potential results are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
The implied volatility of the Call options was 39.5 when this position was established.  This is a very high level which in large part is due to the uncertainty associated with the upcoming earnings report on Nov 2nd and its annual Singles Day sale on Nov 11th.

The transactions were as follows:
10/23/2017 Bought 300 shares of Alibaba stock @ $174.13 per share 
10/23/2017 Sold 3 Alibaba November 17th, 2017 $165.00 Call options @ $12.73 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $48,426.96
= ($174.13 - $12.73)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$3,819.00
= ($12.73* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $165.00 strike price at Nov 17th expiration): -$2,743.95
= ($165.00 -$174.13)* 300 shares - $4.95 commission

Total Net Profit: +$1,075.05
= (+$3,819.00 options income +$0.00 dividend income -$2,743.95 capital appreciation)

Absolute Return: +2.2%
= +$1,075.05/$48,426.96
Equivalent Annualized Return: +31.2%
= (+$1,075.05/$48,426.96)*(365/26 days)

The downside 'breakeven price' at expiration is at $161.40 ($174.13 - $12.73), which is 7.3% below the current market price of $174.13.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this Alibaba Covered Calls position is 71.3%, so the expected value annualized ROI of this investment (if held until expiration) is +22.2% (+31.2% * 71.3%), a nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $186.86 ($174.13 + $12.73).  This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the October 20th, 2017 options expiration date.


2. Citigroup Inc.(C) -- New Covered Calls Position
The implied volatility of the Call options was 16.5 when this position was established.  There is no intervening earnings report prior to expiration.  There is an upcoming ex-dividend of $.32 on November 3rd which is included in the analysis below.

The transactions were as follows:
10/23/2017 Bought 400 shares of Citigroup stock @ $73.76 per share 
10/23/2017 Sold 4 Citigroup Nov 17th, 2017 $72.50 Call options @ $1.97 per share
Note: this was a simultaneous Buy/Write transaction

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $28,723.63
= ($73.76 - $1.97)* 400 shares + $7.63 commission

Net Profit Components:
(a) Options Income: +$788.00
= ($1.97* 400 shares)
(b) Dividend Income: +$128.00 = $.32 per share * 400 shares 
(c) Capital Appreciation (If Citi is above $72.50 strike price at Nov 17th expiration): -$508.95
= ($72.50 -$73.76)* 400 shares - $4.95 commission

Total Net Profit: +$407.05
= (+$788.00 options income +$128.00 dividend income -$508.95 capital appreciation)

Absolute Return: +1.4%
= +$407.05/$28,723.63
Equivalent Annualized Return: +19.9%
= (+$407.05/$28,723.63)*(365/26 days)

The downside 'breakeven price' at expiration is at $71.79 ($73.76 - $1.97), which is 2.7% below the current market price of $73.76.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the November 17th, 2017 options expiration) for this Citigroup Covered Calls position is 63.6%, so the expected value annualized ROI of this investment (if held until expiration) is +12.7% (+19.9% * 63.6%), a nice result for this in-the-money Covered Calls position.   

No comments:

Post a Comment