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. For this fundamental/value investor, Alibaba continues to be a very attractive investment opportunity. The past 5-year compound annual growth rate has been +46.0% for revenue, +28.4% for net income, and +38.6% for free cash flow. For such an ongoing high growth rate, the current fiscal year estimated P/E Ratio of 26 is at a very attractive, value-oriented level.
Incredibly, analysts are universally bullish on Alibaba. According to Reuters, all forty-seven analysts rating Alibaba stock have it as either a 'Buy' or 'Outperform'. None rate it as 'Neutral', 'Underperform', or 'Sell'. Their average price target is $215 (30.6% above the current price).
As shown below, the potential return-on-investment result is +3.0% absolute return in 29 days (equivalent to a +37.4% annualized return-on-investment).
Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position
08/23/2019 Bought 400 shares of Alibaba stock @ $164.67 per share
08/23/2019 Sold 4 Alibaba September 20th, 2019 $160.00 Call options @ $9.30 per share
Note: this was a simultaneous Buy/Write transaction. The Implied Volatility of the Call options was 36.0 when this transaction was executed, well above the 3-month Historic Volatility of 31.3. As detailed below, this high Implied Volatility provides for an immediate generous income credit of $3,720 from selling these 2.9% in-the-money Call options.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $62,155.63
= ($164.67 - $9.30) * 400 shares + $7.63 commission
Net Profit Components:
(a) Options Income: +$3,720.00
= ($9.30 * 400 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA stock is above $160.00 strike price at September 20th expiration): -$1,872.95
= ($160.00 -$164.67) * 400 shares - $4.95 commission
Total Net Profit: +$1,847.05
= (+$3,720.00 options income +$0.00 dividend income -$1,872.95 capital appreciation)
Absolute Return: +3.0%
= +$1,847.05/$62,155.63
Equivalent Annualized Return: +37.4%
= (+$1,847.05/$62,155.63)*(365/29 days)
The downside 'breakeven price' at expiration is at $155.37 ($164.67 - $9.30), which is 5.6% below the current market price of $164.67.
Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the September 20, 2019 options expiration) for this Alibaba Covered Calls position is 63.8%, so the expected value annualized ROI of this investment (if held until expiration) is +23.9% (+37.4% * 63.8%), a very good result for this moderately in-the-money Covered Calls position, especially given that there is no earnings report prior to the options expiration date.
The 'crossover price' at expiration is $169.30 = $164.67 + [$9.30 - ($164.67 - $160.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the September 20th, 2019 options expiration date rather than establishing this Covered Calls position.
