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Thursday, June 21, 2018

Covered Calls Established in Lam Research Corporation

Today, a Covered Calls position was established by buying 200 shares of Lam Research Corp. (ticker symbol LRCX) stock at $175.85 and selling 2 July 20th, 2018 $175.00 Call options at $7.30 -- a net debit of $168.55 per share.   The Implied Volatility of these Call options was 33.4 when this position was established, a relatively high level given that the next earnings report is after the July 20th options expiration date.  Given the Covered Calls Advisor's current Overall Market Meter sentiment of Slightly Bearish, a slightly in-the-money position was established.

Lam Research is either 'Buy' or 'Outperform' rated by 19 of the 22 analysts that cover its stock according to Reuters.  The Covered Calls Advisor believes that Lam Research continues to be incorrectly perceived as a cyclical stock when in reality it has successfully transitioned itself into a secular growth company and is now best positioned in the semiconductor equipment industry to benefit from the expected ongoing double-digit annual revenue growth in big data.  Lam Research appeared in the screeners developed by the Covered Calls Advisor for both 'Free Cash Flow and Cash Return on Invested Capital' and also the 'Warren Buffett' screen that includes Quality (ROE > 20%), Value (P/E < 15), and Growth (Estimated Long-Term Earnings Growth >15%) metrics.  Finally, using a Discounted Cash Flow analysis, the one-year target price for Lam Research is in the mid-$200s .

As detailed below, a potential outcome for this investment is +3.8% absolute return-on-investment for the next 30 days (equivalent to +46.4% on an annualized return basis) if the stock closes above the $175.00 strike price on the July 20th options expiration date.

Lam Research Corp. (LRCX) -- New Covered Calls Position
The transactions were as follows:
06/21/2018 Bought 200 shares of Lam Research stock @ $175.85 per share 
06/21/2018 Sold 2 Lam Research July 20th, 2018 $175.00 Call options @ $7.30 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: $33,716.29
= ($175.85 - $7.30)* 200 shares + $6.29 commission

Net Profit Components:
(a) Option Income: +$1,460.00
= ($7.30 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If LRCX is above $175.00 strike price at July 20th expiration): -$174.95
= ($175.00 -$175.85)* 200 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$1,285.05
= (+$1,460.00 option income +$0.00 dividend income -$174.95 capital appreciation)

Absolute Return: +3.8%
= +$1,285.05/$33,716.29
Equivalent Annualized Return: +46.4%
= (+$1,285.05/$33,716.29)*(365/30 days)

The downside 'breakeven price' at expiration is at $168.55 ($175.85 - $7.30), which is 4.2% below the current market price of $175.85.  This is good protection given the relatively high +46.4% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the July 20th, 2018 options expiration) for this Lam Research Covered Calls position is 53.6%, so the expected value annualized ROI of this investment (if held until expiration) is +24.9% (+46.4% * 53.6%), a nice expected value profit for this in-the-money Covered Calls position.   

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