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Thursday, April 19, 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 $191.62 and selling 2 May 18th, 2018 $190.00 Call options at $9.34 -- a net debit of $182.28 per share.   The Implied Volatility of these May 18th $190.00 Call options was 38.6 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.

Lam Research is either 'Buy' or 'Outperform' rated by 18 of the 20 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 +4.2% absolute return-on-investment for the next 30 days (equivalent to +51.4% on an annualized return basis) if the stock closes above the $190.00 strike price on the May 18th options expiration date.

Lam Research Corp. (LRCX) -- New Covered Calls Position
The transactions were as follows:
04/19/2018 Bought 200 shares of Lam Research stock @ $191.62 per share 
04/19/2018 Sold 2 Lam Research May 18th, 2018 $190.00 Call options @ $9.34 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: $36,462.29
= ($191.62 - $9.34)* 200 shares + $6.29 commission
Net Profit Components:
(a) Option Income: +$1,868.00
= ($9.34 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If LRCX is above $190.00 strike price at May 18th expiration): -$328.95
= ($190.00 -$191.62)* 200 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$1,539.05
= (+$1,868.00 option income +$0.00 dividend income -$328.95 capital appreciation)

Absolute Return: +4.2%
= +$1,539.05/$36,462.29
Equivalent Annualized Return: +51.4%
= (+$1,539.05/$36,462.29)*(365/30 days)

The downside 'breakeven price' at expiration is at $182.28 ($191.62 - $9.34), which is 4.9% below the current market price of $191.62.  This is good protection given the relatively high +51.4% 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 Lam Research Covered Calls position is 56.1%, so the expected value annualized ROI of this investment (if held until expiration) is +28.8% (+51.4% * 56.1%), a nice expected value profit for this in-the-money Covered Calls position.   

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