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Tuesday, February 13, 2018

Covered Calls Established in Lam Research Corp.

Today, a Covered Calls position was established by buying 200 shares of Lam Research Corp. (ticker symbol LRCX) stock at $169.41 and selling 2 March 16th, 2018 $160.00 Call options at $13.86 -- a net debit of $155.55 per share.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.

The Implied Volatility of the March 16th $160.00 Call options was 44.5 when this position was established.  With the sharp decline in LRCX over the past few weeks, the Implied Volatility has spiked up dramatically to its highest level in more than 2 years.  Selling this Covered Call at this time seems very advantageous, especially since there is no quarterly earnings report prior to expiration.  In addition there is an upcoming ex-dividend of $.50 on March 6th which is included in the detailed analysis below.

Lam Research appeared on the Covered Calls Advisor's QVG (Quality, Value, and Growth) screener.  In addition, LRCX's trailing twelve months tax rate was 34.2%, so it will benefit substantially as a result of the significantly lower corporate tax rate in the recently passed tax bill.  Furthermore, Lam Research is either 'Buy' or 'Outperform' rated by 16 of the 17 analysts that cover its stock according to Reuters.  The Credit Suisse analyst summarized his detailed analysis this way: "We believe that the Street is missing the growth and cash return potential and is mispricing LRCX.  Its a margin protected way to play big data growth.  The company is benefiting from the 3D NAND transition and is well poised to benefit from the cyclical recovery in memory in 2018.  Company also has about 20% market cap in net cash and could return 50% market cap by 2020."

As detailed below, a potential outcome for this investment is +3.05% absolute return-on-investment for the next 32 days (equivalent to +34.7% on an annualized return basis) if the stock closes above the $160.00 strike price on the March 16th options expiration date.

Lam Research Corp. (LRCX) -- New Covered Calls Position
The transactions were as follows:
02/13/2018 Bought 200 shares of Lam Research stock @ $169.41 per share 
02/13/2018 Sold 2 Lam Research Mar 16th, 2017 $160.00 Call options @ $13.68 per share
Note: this was a simultaneous Buy/Write transaction
03/06/2018 Upcoming ex-dividend of $.50 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $31,152.29
= ($169.41 - $13.68)* 200 shares + $6.29 commission
Net Profit Components:
(a) Option Income: +$2,736.00
= ($13.68 * 200 shares)
(b) Dividend Income: +$100.00
= $.50 per share * 200 shares 
(c) Capital Appreciation (If LRCX is above $160.00 strike price at Mar 16th expiration): -$1,886.95
= ($160.00 -$169.41)* 200 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$949.05
= (+$2,736.00 option income +$100.00 dividend income -$1,886.95 capital appreciation)

Absolute Return: +3.05%
= +$949.05/$31,152.29
Equivalent Annualized Return: +34.7%
= (+$949.05/$31,152.29)*(365/32 days)

The downside 'breakeven price' at expiration is at $155.23 ($169.41 - $13.68 - $.50), which is 8.4% below the current market price of $169.41.  This is substantial protection given the relatively high +34.7% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2017 options expiration) for this Lam Research Covered Calls position is 69.6%, so the expected value annualized ROI of this investment (if held until expiration) is +24.2% (+34.7% * 69.6%), a nice expected value profit for this moderately in-the-money Covered Calls position.   

4 comments:

  1. Hi Jeff,

    Happy Friday.

    Thanks for great trades. Love your website. I am a regular visitor to your website. Couple of questions:

    1) How did you manage your positions during last week's market volatility? Did you sleep well?

    2) Do you do reverse covered call or SPY or other ETF Iron Condors? (Meaning...Buy deep-in-the-money-put and sell put)

    3) Why there were no trades in USO? Since last year, crude is going up, but I am surprised there were no trades in USO in your forum. I know you picked other great trades(LOVE YOUR TRADES). This question is because USO had very little correlation to market in general. Just wanted to get your perspective on USO.


    Thanks again.
    Sankar.

    ReplyDelete
    Replies
    1. Sankar,

      Thank you for your kind comment.

      1. During 9.7% decline week (Feb 2nd to Feb 9th), I maintained my disciplined approach. I didn't sell anything and actually established 4 new Covered Calls positions (SYF, RIO, BAC, and BABA) with March 16th expirations. Although this week's pricing recovery has not retraced the entire decline from last week, I'm pleased that the stock prices in all 4 positions are now above my purchase price.

      2. As a young adult, I studied and experimented with a variety of options strategies, but quickly settled on Covered Calls as the best approach for me. So, for more than 30 years now, my primary investing approach has been (and continues to be) Covered Calls.

      3. No USO positions because of its issues with tracking errors, contango, monthly rolls, and expense ratio. Suggest you do a Google search on "Oil ETF tracking errors" for details.

      Jeff

      Delete
    2. I didn't sell either, but I did roll down two of my covered call positions. CELG I rolled from $100 to $98.5 while it was trading below $95. It is currently at $95.27 and I rolled out the $98.5 two weeks for an additional $.93 credit. Current B/E price is $97.25.

      I also rolled my $46 STLD strike down to $45. But, STLD has rallied significantly just in the last few days and my shares will be called. The result of this trade is now a scratch.

      Delete
  2. I have been trading USO for the past 1 year and it was successful...didn't know about tracking errors. Good to know...I have some homework to do in USO...I will do the search and research on tracking errors.

    I am doing mostly covered calls/collars and occasional other strategies.

    Referred my friends and family to your website. Great financial content.

    Thanks Jeff for sharing.

    Regards
    Sankar.

    ReplyDelete