As detailed below, a potential outcome for this investment is +2.6% absolute return-on-investment for the next 22 days (equivalent to +43.8% on an annualized return basis) if the stock closes above the $50.00 strike price on the May 18th options expiration date.
Alcoa Corporation (AA) -- New Covered Calls Position
04/27/2018 Bought 400 shares of Alcoa stock @ $51.65 per share
04/27/2018 Sold 4 Alcoa May 18th, 2018 $50.00 Call options @ $2.95 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: $19,487.63
= ($51.65 - $2.95) * 400 shares + $7.63 commission
Net Profit Components:
(a) Option Income: +$1,180.00
= ($2.95 * 400 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alcoa stock is above $50.00 strike price at May 18th expiration): -$664.95
= ($50.00 -$51.65) * 400 shares - $4.95 commission
Potential Total Net Profit (If assigned at expiration): +$515.05
= (+$1,180.00 options income +$0.00 dividend income -$664.95 capital appreciation)
Absolute Return: +2.6%
= +$515.05/$19,487.63
Equivalent Annualized Return: +43.8%
= (+$515.05/$19,487.63)*(365/22 days)
The downside 'breakeven price' at expiration is at $48.70 ($51.65 - $2.95), which is 5.7% below the current market price of $51.65. This is good protection given the relatively high +43.8% 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 Alcoa Corporation Covered Calls position is 65.0%, so the expected value annualized ROI of this investment (if held until expiration) is +28.5% (+65.0% * 43.8%), a nice expected value profit for this in-the-money Covered Calls position.
