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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.