- Baidu Inc. (ticker BIDU) by purchasing 100 shares at $168.69 and selling one April 18th, 2019 Call option at the $165.00 strike price; and
- Medtronic PLC (ticker MDT) by purchasing 200 shares at $92.08 and selling two March 29th, 2019 Call options at the $91.00 strike price.
The open interest in the Baidu Call option was 881 contracts and its implied volatility (IV) was 26.3 when this position was established. This IV level is attractive given the current low level of the S&P 500's Volatility Index as well as Baidu's next earnings report not being until April 25th (i.e. after the April 18th options expiration date). An in-the-money strike was selected given the Covered Calls Advisor's current Overall Market Meter sentiment (see right sidebar) of "Slightly Bearish".
Medtronic goes ex-dividend tomorrow (March 21st) at $.50 per share and a short-term expiration of March 29th provides the opportunity to achieve a good return-on-investment if the stock is above the $91.00 strike price at next Friday's options expiration. The Covered Calls Advisor rarely establishes Covered Calls of short duration, almost always preferring next-month durations, but I decided to experiment on this dividend capture situation with this high quality medical equipment and services company.
As detailed below, potential return on investment results are:
- Baidu Inc.: +2.2% absolute return (equivalent to +27.2% annualized roi) for the next 30 days; and
- Medtronic PLC: +0.9% absolute return in 10 days (equivalent to a +32.0% annualized return-on-investment).
1. Baidu Inc. (BIDU) -- New Covered Call Position
The transaction today was as follows:03/20/2019 Bought 100 shares of BIDU @ $168.69
03/20/2019 Sold 1 BIDU April 18, 2019 $165.00 Call option @ $7.35
Note: this was a simultaneous Buy/Write transaction.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $16,128.38
= ($168.69 - $7.35) * 100 shares + $5.62 commission
Net Profit:
(a) Options Income: +$735.00
= ($7.35 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Baidu shares are above $165.00 strike price at April 18th expiration): -$373.95
= ($165.00 - $168.69) * 100 shares - $4.95 commission
Total Net Profit (If Baidu stock price is above $165.00 strike price at April 18th options expiration): +$361.05
= (+$735.00 options income +$0.00 dividend income -$373.95 capital appreciation)
Absolute Return (If Baidu stock price is above $165.00 strike price at April 18th options expiration): +2.2%
= +$361.05/$16,128.38
Annualized Return: +27.2%
= (+$361.05/$16,128.38)*(365/30 days)
The downside 'breakeven price' at expiration is at $161.34 ($168.69 - $7.35), which is 4.4% below the current market price of $168.69.
The probability of making a profit (if held until the April 18, 2019 options expiration) for this Baidu Inc. Covered Calls position is 63.7%. This compares with a probability of profit of 50.3% for a buy-and-hold of Baidu shares over the same time period. Using this probability of profit of 63.7%, the expected value annualized return-on-investment (if held until expiration) is +17.3% (+27.2% * 63.7%), a satisfactory risk/reward profile for this relatively conservative investment.
2. Medtronic PLC (MDT) -- New Covered Calls Position
03/20/2019 Bought 200 shares of MDT @ $92.08
03/20/2019 Sold 2 MDT March 29th, 2019 $91.00 Call options @ $1.40
Note: this was a simultaneous Buy/Write transaction.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $18,142.29
= ($92.08 - $1.40) * 200 shares + $6.29 commission
Net Profit:
(a) Options Income: +$280.00
= ($1.40 * 200 shares)
(b) Dividend Income: +$100.00
= $.50 per share * 200 shares
(c) Capital Appreciation (If MDT shares are above $91.00 strike price at March 29th expiration): -$220.95
= ($91.00 - $92.08) * 200 shares - $4.95 commission
Total Net Profit (If Medtronic stock price is above $91.00 strike price at March 29th options expiration): +$159.05
= (+$280.00 options income +$100.00 dividend income -$220.95 capital appreciation)
Absolute Return (If Medtronic stock price is above $91.00 strike price at April 18th options expiration): +0.9%
= +$159.05/$18,142.29
Annualized Return: +32.0%
= (+$159.05/$18,142.29)*(365/10 days)
