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Wednesday, January 17, 2018

Established Covered Calls Position in Alibaba Group Holding Ltd.

Today, a new Covered Calls positions was established in Alibaba Group Holding Ltd. with a February 16th, 2018 options expiration date.  This is the second Covered Calls position established for the Feb2018 expiration and a moderately conservative in-the-money position was established given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral and the uncertainty associated with an upcoming quarterly earnings report prior to the February expiration date.

The Covered Calls Advisor intended to continue the pattern of prior months by establishing Covered Calls positions in Alibaba.  There was no readily apparent reason for the $10 decline in the stock price during the past two days -- my best guess is that there is some institutional investors who (after the huge run-up in Alibaba in the past year) are paring back some of their holdings in Alibaba in order to re-balance their portfolios.  So, this advisor decided to take advantage of the current elevated implied volatility of 36.2 in these Call options when this position was established today and not to wait for the Alibaba Jan2018 options to expire before establishing this Feb2018 Covered Calls position.

As detailed below, a potential return-on-investment result is +2.2% absolute return in 31 days (equivalent to a +25.6% annualized return-on-investment).
Today's transactions and potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
The transactions were as follows:
01/17/2017 Bought 300 shares of Alibaba stock @ $180.09 per share 
01/17/2017 Sold 3 Alibaba February 16th, 2017 $170.00 Call options @ $13.73 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: $49,914.96
= ($180.09 - $13.73)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$4,119.00
= ($13.723* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at Feb 16th expiration): -$3,031.95
= ($170.00 -$180.09)* 300 shares - $4.95 commission

Total Net Profit: +$1,087.05
= (+$4,119.00 options income +$0.00 dividend income -$3,031.95 capital appreciation)

Absolute Return: +2.2%
= +$1,087.05/$49,914.96
Equivalent Annualized Return: +25.6%
= (+$1,087.05/$49,914.96)*(365/31 days)

The downside 'breakeven price' at expiration is at $166.36 ($180.09 - $13.73), which is 7.6% below the current market price of $180.09.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the February 16th, 2017 options expiration) for this Alibaba Covered Calls position is 72.7%, so the expected value annualized ROI of this investment (if held until expiration) is +18.6% (+25.6% * 72.7%), a very nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $183.73 = $180.09 + [$13.73 - ($180.09 - $170.00)]. 
This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the February 16th, 2017 options expiration date rather than establishing this Covered Calls position.

6 comments:

  1. I got in as well thanks again Jeff

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  2. Wouldn't the cross over price be 183.82?

    At expiration, if the price is 185, the person who bought and held would have made 500 while you would have made $364 (-18009+17000) + 1373= 364

    ReplyDelete
    Replies
    1. Good catch Matt. I have now corrected this in the last paragraph of the post.

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  3. 1 trading day left before expiration. I am struggling a bit to find new setups. LOW, WBA and C have dividends upcoming and no earnings. Am considering LOW with a $0.41 dividend...either the 100 or 97.5 strike.

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  4. Out of those three I would vote for LOW at 100. The strike price of 100. It had a run up about a week ago, but with the hurricane clean up and the new officers not being installed until march I think looks pretty good. C the strike would have to be too close I think and WBA the dividend is too far out that would be a good one to look at if we get early assignment on LOW. Let me know what you think.

    ReplyDelete
    Replies
    1. I think I am going to skip those for at least right now. I am still looking for others.

      Maybe we will get a pullback next week and an uptick in IV.

      I have an open order for a TLT March ultra-wide iron condor. Looking to collect $195 in premium or about 10% RoC. I will close it at 50% max profit or between 22-30 DTE which ever comes first. It has not filled though.

      Delete