Closed Postion in Skyworks Solutions Inc.

Last Friday, the August 17th, 2018 Covered Calls position in Skyworks Solutions Inc. (ticker symbol SWKS) expired with the stock price at $91.85, below the $92.50 strike price -- so the Call options expired and the 200 shares were retained in the Covered Calls Advisor's Portfolio.  The stock moved higher today and the position was closed out by selling the 200 shares at $92.46.  The Covered Calls Advisor had already established a next-month (Sept 21st expiration date) Covered Calls position in another semiconductor industry company, Lam Research (whose stock this advisor is more bullish on for the next year), so this position in Skyworks was liquidated today at a nice profit.

As detailed below, this Skyworks Solutions position achieved a return-on-investment result of +2.0% absolute return in 29 days (equivalent to a +25.0% annualized return-on-investment).


Skyworks Solutions Inc. (SWKS) -- Covered Calls Position Closed

The transactions were:
07/23/2018 Bought 200 Skyworks Solutions shares @ $95.37
07/23/2018 Sold 2 SWKS 08/17/2018 $92.50 Call options @ $4.37
Note: a simultaneous buy/write transaction was executed.
08/06/2018 Quarterly ex-dividend date with a $.38 per share dividend forthcoming
08/17/2018 2 Call options expired and 200 shares of SWKS stock retained in Covered Calls Advisor Portfolio
08/21/2018 Sold 200 shares of SWKS at $92.46 per share

The overall performance result (including commissions) for this Skyworks Solutions position were as follows:
Covered Calls Cost Basis: $18,204.95
= ($95.37 - $4.37) *200 + $4.95 commission

Net Profit Components:
(a) Options Income: +$872.66
= ($4.37*200 shares) - $1.34 commissions
(b) Dividend Income: +$76.00 = $.38 per share x 200 shares

(c) Capital Appreciation (SWKS purchased at $95.37 and sold today at $92.46): -$578.95
+($92.46-$95.37)*200 shares - $4.95 commission

Total Net Profit: +$361.71

= (+$872.66 options income +$76.00 dividend income -$586.95 capital appreciation)

Absolute Return: +2.0%

= +$361.71/$18,204.95

Annualized Return: +25.0%

= (+$361.71/$18,204.95)*(365/29 days)

Continuation of Covered Calls Position in Metlife Inc.

Last Friday, Metlife stock closed at $45.94 which was below the $46.50 strike price.  Today, the Covered Calls position was continued by selling 5 September 21, 2018 $47.50 Call options at $.52 when the price of MET was $46.37 per share.  

As detailed below, two potential outcomes for this investment are:

• +2.1% absolute return-on-investment (equivalent to +6.3% on an annualized basis) over the 121 days investment period if the stock closes unchanged at $46.37 on the Sept 21st options expiration date; OR
• +4.5% absolute return-on-investment (equivalent to +13.7% on an annualized basis) over the 121 days investment period if the stock closes above the $47.50 strike price on the Sept 21st 15th options expiration date.

Metlife Inc. (MET) -- New Covered Calls Position

The transactions details to-date have been as follows:
05/25/2018 Bought 500 MET shares @ $47.63
05/25/2018 Sold 5 MET June 15, 2018 $47.50 Call options @ $.99
Note: a simultaneous buy/write transaction was executed.
06/15/2018 5 MET 6/15/2018 $47.50 Call options expired with stock price below the strike price
08/03/2018 Ex-dividend of $.42 per share
08/06/2018 Sold 5 MET 8/17/2018 $46.50 Call options @ $.33
08/17/2018 5 MET 8/17/2018 $46.50 Call options expired
Note: the price of MET stock was $45.94 upon options expiration
08/20/2018 Sold 5 MET 9/21/2018 $47.50 Call options @ $.52
Note: the price of MET stock was $46.37 when these Calls were sold

A possible overall performance result (including commissions) for this MET Covered Calls position is as follows:
Stock Purchase Cost Basis: $23,328.30
= ($47.63 -$.99) *500 shares +$8.30 commission

Net Profit:
(a) Options Income: +$903.40
= ($.99 +$.33 +$.52) *500 shares - $16.60 commissions
(b) Dividend Income: +$210.00
= $.42 per share x 500 shares

(c) Capital Appreciation (If price of Metlife stock is unchanged at $46.37 at Sept 21st options expiration date): -$634.95
=+($46.37-$47.63)*500 - $4.95 commission; OR

(c) Capital Appreciation (If price of Metlife stock is above $47.50 strike price at Sept 21st options expiration date): -$69.95
=+($47.50-$47.63)*500 - $4.95 commission

1. Total Net Profit (If price of Metlife stock is unchanged at $46.37 at Sept 21st options expiration date): +$478.45

= (+$903.40 +$210.00 -$634.95); OR

2. Total Net Profit (If price of Metlife stock is above $47.50 strike price at Sept 21st options expiration date): +$1,043.45

= (+$903.40 +$210.00 -$69.95)

1. Absolute Return (price of Metlife stock is unchanged at $46.37 at Sept 21st options expiration date): +2.1%

= +$478.45/$23,328.30

Annualized Return: +6.3%

= (+$425.05/$23,328.30)*(365/119 days); OR

2. Absolute Return (If price of Metlife stock is above $47.50 strike price at Sept 21st options expiration date): +4.5%

= +$1,043.45/$23,328.30

Annualized Return: +13.7%

= (+$1,043.45/$23,328.30)*(365/119 days)

August 17th, 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had five positions with August 17th, 2018 options expirations:

• Two Covered Calls positions (Blackstone Group L.P. and Deere & Co.) closed at yesterday's  monthly options expiration in-the-money (stock price above the options strike price), so those shares were assigned (sold) at their respective strike prices. 

• Three positions (Metlife Inc., Skyworks Solutions Inc., and U.S. Steel Corp.) closed with the stock price below the strike price, so the options expired and the long stock positions now remain in the Covered Calls Advisor Portfolio.  Within the next few days, these stocks will either be sold or next month Call options will be sold against the stock to re-establish Covered Calls positions.  As always, all transactions will be posted on this blog on the same day they occur. 

For the two positions assigned on the August 17th expiration, the average annualized return-on-investment results were:

• Blackstone Group L.P.:  +3.0% absolute return (+45.8% annualized return) in 24 days
• Deere & Co: +5.8% absolute return (+49.0% annualized return) in 45 days

The cash now available in the Covered Calls Advisor Portfolio from the closing of these two positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  However, there are three important factors (near all-time high stock market valuations, tightening monetary policies, and rising trade tensions) that are, for the time being, causing the Covered Calls Advisor to increase cash (i.e. money-market) holdings to a majority position in the overall portfolio.   

So far in 2018, thirty-six of thirty-nine positions (92.3%) were assigned profitably.  This far exceeds the Covered Calls Advisor's overall long-term goal of having at least two-thirds (67%) of positions closed out at a profit.  None of the remaining three positions (Metlife Inc., Skyworks Solutions Inc., and U.S. Steel Corp.) have yet to be closed out, but instead are currently held as open long stock positions in the Covered Calls Advisor Portfolio.  For the thirty-six positions closed out so far in 2018, the average annualized return-on-investment is +29.3%.  

To demonstrate how return-on-investment results for a closed Covered Calls position are calculated, the details for the Blackstone Group assigned position is detailed below:

Blackstone Group L.P. (BX) -- Covered Calls Position Closed

The transactions were as follows:
07/25/2018 Bought 500 shares of Blackstone Group stock @ $35.91 per share 
07/25/2018 Sold 5 BX August 17th, 2018 $36.00 Call options @ $.41 per share
07/27/2018 BX went ex-dividend at $.58 per share
08/17/2018 5 Call options were in-the-money at options expiration, so the 500 shares of Blackstone stock were sold at the $36.00 strike price

The overall performance result (including commissions) was:
Covered Calls Cost Basis: $17,758.30
= ($35.91 - $.41)* 500 shares + $8.30 commissions

Net Profit Components:
(a) Options Income: +$205.00
= ($.41* 500 shares)
(b) Dividend Income: +$290.00
= $.58 ex-div per share  x 500 shares 
(c) Capital Appreciation (BX stock was assigned at $36.00 strike price at Aug 17th expiration): +$40.05
= ($36.00 -$35.91)* 500 shares - $4.95 commission

Total Net Profit: +$535.05
= (+$205.00 options income +$290.00 dividend income +$40.05 capital appreciation)

Absolute Return: +3.0%
= +$535.05/$17,758.30
Equivalent Annualized Return: +45.8%
= (+$535.95/$17,758.30)*(365/24 days)

This result is an example of the 'trifecta' that can sometimes be achieved via Covered Calls investing.  Profit contributions were obtained from all three possible sources: Call options income, dividend income, and stock capital appreciation.

Established Covered Calls in Lam Research Corp.

Today, a Covered Calls position was established in Lam Research Corp. (ticker symbol LRCX) with a September 21st, 2018 expiration and at the $165.00 strike price.  This position has an expected upcoming quarterly ex-dividend on September 6th of $1.10 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise because the ex-dividend is prior to the Sept 21st, 2018 options expiration date.  Quarterly earnings were reported recently, so the next earnings report will not be until mid October.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, a slightly in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +2.85% absolute return (equivalent to +52.0% annualized return for the next 20 days) if the stock is assigned early (business day prior to Sept 6th ex-date); OR +3.5% absolute return (equivalent to +35.8% annualized return over the next 36 days) if the stock is assigned on the September 21st options expiration date.


Lam Research Corp. (LRCX) -- New Covered Calls Position
Although unlikely, if the current time value (i.e. extrinsic value) of $4.60 [$7.74 option premium - ($168.14 stock price - $165.00 strike price)] remaining in the two short Call options decays substantially (down to about $.15 or less) by Sept 5th (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 200 Lam Research shares away to capture the dividend payment.

The transactions were:
08/17/2018 Bought 200 Lam Research Corp. shares @ $168.14
08/17/2018 Sold 2 LRCX 09/21/2018 $165.00 Call options @ $7.74
Note: a simultaneous buy/write transaction was executed.
09/06/2018 Expected upcoming quarterly ex-dividend of $1.10 per share

Two possible overall performance results (including commissions) for this Lam Research Covered Calls position are as follows:
Covered Calls Cost Basis: $32,084.95
= ($168.14 - $7.74) *200 + $4.95 commission

Net Profit Components:
(a) Options Income: +$1,546.66
= ($7.74*200 shares) - $1.34 commissions
(b) Dividend Income (If option exercised early on Sept 5th, the business day prior to Sept 6th ex-div date): +$0.00; or
(b) Dividend Income (If Lam Research shares assigned at Sept 21st, 2018 expiration): +$220.00
= ($1.10 dividend per share x 200 shares)

(c) Capital Appreciation (If LRCX assigned early on Sept 5th): -$632.95
+($165.00-$168.14)*200 shares - $4.95 commissions; or
(c) Capital Appreciation (If LRCX assigned at $165.00 strike price at options expiration): -$632.95
+($165.00-$168.14)*200 shares - $4.95 commissions

1. Total Net Profit [If option exercised on Sept 5th (business day prior to Sept 6th ex-dividend date)]: +$913.71

= (+$1,546.66 +$0.00 -$632.95); or

2. Total Net Profit (If Lam Research shares assigned at $165.00 at Sept 21, 2018 expiration): +$1,133.71

= (+$1,546.66 +$220.00 -$632.95)

1. Absolute Return [If LRCX option exercised on Sept 5th (business day prior to ex-dividend date)]: +2.85%

= +$913.71/$32,084.95

Annualized Return (If option exercised early): +52.0%

= (+$913.71/$32,084.95)*(365/20 days); or

2. Absolute Return (If Lam Research shares assigned at $165.00 at Sept 21, 2018 expiration): +3.5%

= +$1,133.71/$32,084.95

Annualized Return (If LRCX stock assigned at $92.50 at Aug 17, 2018 expiration): +35.8%

= (+$1,133.71/$32,084.95)*(365/36 days)

Either outcome would provide an excellent return-on-investment result.  These returns will be achieved as long as the stock is above the $165.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $159.30 ($168.14 -$7.74 -$1.10) provides 5.3% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential Covered Calls using a dividend capture strategy.  The minimum threshold desired to establish a position is that at least nine of these eleven criteria must be achieved.  As shown in the table below, all of the eleven criteria are achieved for this Lam Research Corp. Covered Calls position.

Covered Calls Position Established in Alibaba Group Holding Ltd.

Today, a new Covered Calls positions was established in Alibaba Group Holding Ltd. with a September 21st, 2018 options expiration date.  A slightly 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 has declined by about ten percent in the last month, so I decided to take advantage of the spike in implied volatility to 37.0 in the Call options when this position was established today.  There is also an earnings report on August 23rd which contributes to the elevated implied volatility.

As detailed below, a potential return-on-investment result is +4.4% absolute return in 39 days (equivalent to a +40.9% 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:
08/14/2018 Bought 200 shares of Alibaba stock @ $172.96 per share 
08/14/2018 Sold 2 Alibaba Sept 21st, 2018 $170.00 Call options @ $10.10 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: $32,578.29
= ($172.96 - $10.10)* 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$2,020.00
= ($10.10* 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at Sept 21st expiration): -$596.95
= ($170.00 -$172.96)* 200 shares - $4.95 commission

Total Net Profit: +$1,423.05
= (+$2,020.00 options income +$0.00 dividend income -$596.95 capital appreciation)

Absolute Return: +4.4%
= +$1,423.05/$32,578.29
Equivalent Annualized Return: +40.9%
= (+$1,423.05/$32,578.29)*(365/39 days)

The downside 'breakeven price' at expiration is at $162.86 ($172.96 - $10.10), which is 5.8% below the current market price of $172.96.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the September 21st, 2018 options expiration) for this Alibaba Covered Calls position is 58.7%, so the expected value annualized ROI of this investment (if held until expiration) is +24.0% (+40.9% * 58.7%), a very nice result for this in-the-money Covered Calls position.

The 'crossover price' at expiration is $180.10 = $172.96 + [$10.10 - ($172.96 - $170.00)].
This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Sept 21st, 2018 options expiration date rather than establishing this Covered Calls position.