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Monday, June 25, 2018

Established Covered Calls Position in Alibaba Group Holding Ltd.

Today, a new Covered Calls positions was established in Alibaba Group Holding Ltd. with a July 20th, 2018 options expiration date.  A moderately conservative in-the-money position was established given the Covered Calls Advisor's current Overall Market Meter sentiment of Slightly Bearish.

The Covered Calls Advisor intended to continue the pattern of prior months by establishing Covered Calls positions in Alibaba.  The stock price declined by more than $10 today, so I decided to take advantage of the spike in implied volatility to 35.9 in these Call options when this position was established today.

As detailed below, a potential return-on-investment result is +1.8% absolute return in 26 days (equivalent to a +24.7% annualized return-on-investment).

Today's transactions and a potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
The transactions were as follows:
06/25/2018 Bought 200 shares of Alibaba stock @ $190.92 per share 
06/25/2018 Sold 2 Alibaba July 20th, 2018 $180.00 Call options @ $14.06 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: $35,378.29
= ($190.92 - $14.06)* 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$2,812.00
= ($14.06* 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $180.00 strike price at July 20th expiration): -$2,188.95
= ($180.00 -$190.92)* 200 shares - $4.95 commission

Total Net Profit: +$623.05
= (+$2,812.00 options income +$0.00 dividend income -$2,188.95 capital appreciation)

Absolute Return: +1.8%
= +$623.05/$35,378.29
Equivalent Annualized Return: +24.7%
= (+$623.05/$35,378.29)*(365/26 days)

The downside 'breakeven price' at expiration is at $176.86 ($190.92 - $14.06), which is 7.4% below the current market price of $190.92.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the July 20th, 2018 options expiration) for this Alibaba Covered Calls position is 74.9%, so the expected value annualized ROI of this investment (if held until expiration) is +18.5% (+24.7% * 74.9%), a very nice result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $194.06 = $190.92 + [$14.06 - ($190.92 - $180.00)].
This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the July 20th, 2018 options expiration date rather than establishing this Covered Calls position.

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