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Friday, May 4, 2018

Continuation of Covered Calls Position in Alibaba Group Holding Ltd.

A Covered Calls position in Alibaba Group Holding Ltd. at the $185.00 strike price and with an April 20th, 2018 options expiration date closed out-of-the-money, so the 200 shares of Alibaba were retained in the Covered Calls Advisor Portfolio.  Today, Alibaba reported their 4th quarter 2018 earnings and although their profit margin declined, their sales increased by a truly amazing 61% compared with the same quarter last year -- and they expect 2019 sales to grow at a similar pace as occurred in 2018.  The trailing 12 months P/E ratio is at 36, high for most companies but reasonable given Alibaba's ongoing growth potential.

The Covered Calls Advisor considers Alibaba to be a core portfolio holding, so the current intention is to continue the pattern of prior months by establishing ongoing monthly Covered Calls positions in Alibaba. 

As detailed below, two potential return-on-investment results are: 
  • +6.7% absolute return in 66 days (equivalent to a +36.8% annualized return-on-investment) if Alibaba stock price is unchanged at $188.15 at the May 18th expiration; OR
  • +7.7% absolute return in 66 days (equivalent to a +42.5% annualized return-on-investment) if Alibaba stock is above $190.00 strike price at May 18th expiration.
The transactions and a potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- Continuation Covered Calls Position
The transactions were as follows:
03/13/2018 Bought 200 shares of Alibaba stock @ $189.78 per share 
03/13/2018 Sold 2 Alibaba April 20th, 2018 $185.00 Call options @ $10.22 per share
Note: this was a simultaneous Buy/Write transaction
04/20/2018 Call options expired and 200 shares were retained in the Covered Calls Advisor Portfolio
05/04/2018 Sold 2 Alibaba May 18th, 2018 $190.00 Call options @ $3.40 per share
Note: the price of Alibaba stock was $188.15 when these Call options were sold

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $35,918.29
= ($189.78 - $10.22)* 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$2,724.00
= ($10.22 + $3.40) * 200 shares
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock price is unchaged at $188.15 at the May 18th expiration): -$330.95
= ($188.15 -$189.78)* 200 shares - $4.95 commission; OR
(c) Capital Appreciation (If BABA stock is above $190.00 strike price at May 18th expiration): +$39.05
= ($190.00 -$189.78)* 200 shares - $4.95 commission

Total Net Profit:
(a) If BABA stock price is unchaged at $188.15 at the May 18th expiration): +$2,393.05
= (+$2,724.00 options income +$0.00 dividend income -$330.95 capital appreciation); OR
(b) If BABA stock is above $190.00 strike price at May 18th expiration): +$2,763.05
= (+$2,724.00 options income +$0.00 dividend income +$39.05 capital appreciation)

Absolute Return:
(a) If BABA stock price is unchaged at $188.15 at the May 18th expiration): +6.7%
= +$2,393.05/$35,918.29
Equivalent Annualized Return: +36.8%
= (+$2,393.05/$35,918.29)*(365/66 days); OR
(b) If BABA stock is above $190.00 strike price at May 18th expiration): +7.7%
= +$2,763.05/$35,918.29
Equivalent Annualized Return: +42.5%
= (+$2,763.05/$35,918.29)*(365/66 days)

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