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Friday, April 27, 2018

Covered Calls Established in Alcoa Corporation

Today, a Covered Calls position was established by buying 400 shares of Alcoa Corporation (ticker symbol AA) stock at $51.65 and selling 4 May 18th, 2018 $50.00 Call options at $2.95 -- a net debit of $48.70 per share.   The Implied Volatility of these Call options was 37.9 when this position was established.  Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a slightly in-the-money position was established.

As detailed below, a potential outcome for this investment is +2.6% absolute return-on-investment for the next 22 days (equivalent to +43.8% on an annualized return basis) if the stock closes above the $50.00 strike price on the May 18th options expiration date.

Alcoa Corporation (AA) -- New Covered Calls Position
The transactions were as follows:
04/27/2018 Bought 400 shares of Alcoa stock @ $51.65 per share 
04/27/2018 Sold 4 Alcoa May 18th, 2018 $50.00 Call options @ $2.95 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: $19,487.63
= ($51.65 - $2.95) * 400 shares + $7.63 commission
Net Profit Components:
(a) Option Income: +$1,180.00
= ($2.95 * 400 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alcoa stock is above $50.00 strike price at May 18th expiration): -$664.95
= ($50.00 -$51.65) * 400 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$515.05
= (+$1,180.00 options income +$0.00 dividend income -$664.95 capital appreciation)

Absolute Return: +2.6%
= +$515.05/$19,487.63
Equivalent Annualized Return: +43.8%
= (+$515.05/$19,487.63)*(365/22 days)

The downside 'breakeven price' at expiration is at $48.70 ($51.65 - $2.95), which is 5.7% below the current market price of $51.65.  This is good protection given the relatively high +43.8% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the May 18th, 2018 options expiration) for this Alcoa Corporation Covered Calls position is 65.0%, so the expected value annualized ROI of this investment (if held until expiration) is +28.5% (+65.0% * 43.8%), a nice expected value profit for this in-the-money Covered Calls position.