The implied volatility of the Call options has increased recently to a very high level of 51.5 when this position was established; so the $4.20 price per share received when these Calls were sold is a very nice premium to receive for these moderately in-the-money options. This level is especially high given that Micron's next earnings report is after the March expiration date and also the S&P's current Volatility Index is relatively low at 16.5. An in-the-money strike was selected given the Covered Calls Advisor's current Overall Market Meter sentiment (see right sidebar) of "Slightly Bearish".
There is increasingly negative sentiment among analysts regarding the semiconductor industry for 2019 which contributes to the current high implied volatility in the options. This outlook was joined by Goldman Sachs with today's downgrading of Micron (see this article Link), which contributed to the steep sell-off in Micron today, when the price had spiked down 3.7% from yesterday's closing price. The Covered Calls Advisor has a different outlook than Goldman Sachs for Micron. Over time, the demand for its products should continue to grow along with the expected growth in technology (hardware, software, cloud, artificial intelligence, etc. etc.). Micron is in an especially strong position given its memory capabilities and as a leader in leading edge semiconductor technologies (such as 3D Crosspoint). The largest manufacturing equipment provider (Applied Materials) will not report earnings until next week, but Lam Research provided a positive overall outlook for semis for 2019 in their earnings outlook -- somewhat challenging in the first half but more positive for the second half of the year. Micron is priced very attractively on both value and quality metrics, and it also provides a good margin of safety since its current price is well below its one-year target price based on discounted cash flow and other valuation model estimates.
As detailed below, for this position there is potential for a +3.8% absolute return in 36 days (equivalent to a +38.5% annualized return-on-investment).
Micron Technology Inc. (MU) -- New 100% Covered Calls PositionThe transaction today was as follows:
02/08/2019 Bought 500 shares MU @ $37.91
02/08/2019 Sold 5 MU March 15, 2019 $35.00 Call options @ $4.20
Note: this was a simultaneous Buy/Write transaction.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,863.33
= ($37.91 - $4.20) * 500 shares + $8.30 commission
Net Profit:
(a) Options Income: +$2,100.00
= ($4.20 * 500 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron Technology Inc. is above $35.00 strike price at March 15th expiration): -$1,459.95
= ($35.00-$37.91) * 500 shares - $4.95 commission
Total Net Profit (If Micron stock price is above $35.00 strike price at March 15th options expiration): +$640.05
= (+$2,100.00 options income +$0.00 dividend income -$1,459.95 capital appreciation)
Absolute Return (If Micron stock price is above $35.00 strike price at March 15th options expiration): +3.8%
= +$640.05/$16,863.33
Annualized Return: +38.5%
= (+$640.05/$16,863.33)*(365/36 days)
The downside 'breakeven price' at expiration is at $33.71 ($37.91 - $4.20), which is 11.1% below the current market price of $37.91.
The probability of making a profit (if held until the March 15, 2019 options expiration) for this Micron Technology Inc. Covered Calls position is 71.9%. This compares with a probability of profit of 50.3% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 71.9%, the expected value annualized return-on-investment (if held until expiration) is +27.7% (+38.5% * 71.9%), a very good risk/reward profile for this relatively conservative investment.
