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
Today's transactions and potential result are detailed below:
1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
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%
Equivalent Annualized Return: +25.6%
= (+$1,087.05/$49,914.96)*(365/31 days)
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.
'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.