Last week, a Covered Calls position was established in Alibaba Group Holding Ltd. with a March 16th, 2018 options expiration date and at the $180.00 strike price. The Covered Calls Advisor wanted to establish a second Covered Calls position with March 16th Call options, but instead at the $170 strike price. So, early in this morning's trading when the Dow was down by about 250 points, an Alibaba buy/write transaction was executed by buying 100 shares at $178.45 and selling one Call option for $14.15.
As detailed below, a potential return-on-investment result is +3.4% absolute
return in 39 days (equivalent to a +32.2% annualized
Today's transactions and potential result are detailed below:
1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
02/06/2018 Bought 100 shares of Alibaba stock @ $178.45 per share
02/06/2018 Sold 1 Alibaba March 16th, 2018 $170.00 Call option @ $14.15 per share
Notes: 1. The Implied Volatility of the Call option had spiked up to 39.4 when this transaction occurred; and 2. The Call option Open Interest was very liquid at 1,133 contracts, so the bid/ask spread was relatively narrow.
A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $16,435.62
= ($178.45 - $14.15)* 100 shares + $5.62 commission
Net Profit Components:
(a) Options Income: +$1,415.00
= ($14.15* 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at March 16th expiration): -$849.95
= ($170.00 -$178.45)* 100 shares - $4.95 commission
Total Net Profit: +$565.05
= (+$1,415.00 options income +$0.00 dividend income -$849.95 capital appreciation)
Absolute Return: +3.4%
Equivalent Annualized Return: +32.2%
= (+$565.05/$16,435.62)*(365/39 days)
downside 'breakeven price' at expiration is at $174.95 ($178.45 - $14.15),
which is 7.9% below the current market price of $178.45.
Using the Black-Scholes Options Pricing Model, the probability of
making a profit (if held until the March 16th, 2018 options expiration) for
this Alibaba Covered Call position is 67.1%, so the expected value annualized
ROI of this investment (if held until expiration) is +21.6% (+32.2% *
67.1%), a nice result for this moderately in-the-money Covered Call position.
'crossover price' at expiration is $184.15 = $178.45 + [$14.15 - ($178.45 - $170.00)].
This is the
price at expiration above which it would have been more profitable to simply
buy-and-hold Alibaba stock until the March 16th, 2018 options expiration date rather than establishing this Covered Call position.