Established Covered Calls Position in Alibaba Group Holding Ltd.

A new Covered Calls positions was established in Alibaba Group Holding Ltd. with an August 16th, 2019 options expiration date and at the $165.00 strike price when Alibaba was priced at $173.34. 

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. 

As detailed below, a potential return-on-investment result is +1.1% absolute return in 18 days (equivalent to a +22.9% annualized return-on-investment).
The transactions and a potential result are detailed below:

1. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position

The transactions were as follows:
07/30/2019 Bought 300 shares of Alibaba stock @ $173.34 per share 
07/30/2019 Sold 3 Alibaba August 16th, 2019 $165.00 Call options @ $10.20 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: $48,948.96
= ($173.34 - $10.20) * 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$3,060.00
= ($10.20* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $165.00 strike price at August 16th expiration): -$2,506.95
= ($165.00 -$173.34) * 300 shares - $4.95 commission

Total Net Profit: +$553.05
= (+$3,060.00 options income +$0.00 dividend income -$2,506.95 capital appreciation)

Absolute Return: +1.1%
= +$553.05/$48,948.96
Equivalent Annualized Return: +22.9%
= (+$553.05/$48,948.96)*(365/18 days)

The downside 'breakeven price' at expiration is at $163.14 ($173.34 - $10.20), which is 5.9% below the current market price of $173.34.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the August 16, 2019 options expiration) for this Alibaba Covered Calls position is 76.9%, so the expected value annualized ROI of this investment (if held until expiration) is +17.6% (+22.9% * 76.9%), a satisfactory 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 $175.20 = $173.34 + [$10.20 - ($173.34 - $165.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the August 16th, 2019 options expiration date rather than establishing this Covered Calls position.

Early Assignment of Morgan Stanley Covered Calls

Early this morning I received email and text notifications from my broker (Schwab) that all 3 Morgan Stanley (ticker symbol MS) Call options were exercised early, so the 300 shares of Morgan Stanley stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $42.00 strike price. 

Details of the transactions and the results for this Morgan Stanley position are provided below.  The per share price had increased from $43.83 when the position was originally established (on July 17th) to $45.23 at yesterday's market close.  The time value remaining in the Call options had declined to close to $0.00, so the owner of the Calls exercised their option to buy the shares at the $42.00 strike price in order to capture the $.35 dividend.  This early assignment was the Covered Calls Advisor's preferred outcome because it resulted in a higher annualized return-on-investment (32.0% achieved) rather than if the position had instead been assigned on the August 16th options expiration date which (including the $.35 per share dividend) would have resulted in a 23.3% annualized ROI.

The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls position is established.  As always, the transactions details will be posted on this blog site the same day that they occur.

The detailed results for this Morgan Stanley position are provided below.

Morgan Stanley (MS) -- New Covered Calls Position
The transactions were:
07/17/2019 Bought 300 shares of Morgan Stanley stock @ $43.83 per share 
07/17/2019 Sold 3 MS August 16th, 2019 $42.00 Call options @ $2.32 per share
07/29/2019 Early exercise of 3 MS August 16th, 2019 $42.00 Call options, so 300 MS shares assigned (i.e. sold) at $42.00 strike price.

The overall performance result (including commissions) for this Morgan Stanley Covered Calls position was as follows:
Covered Calls Cost Basis: $12,459.96
= ($43.83 - $2.32)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$696.00
= ($2.32* 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$553.95
= ($42.00 -$43.83)* 300 shares - $4.95 commission

Total Net Profit: +$142.05
= (+$696.00 options income +$0.00 dividend income -$553.95 capital appreciation)

Absolute Return: +1.1%
= +$142.05/$12,459.96
Equivalent Annualized Return: +32.0%
= (+$142.05/$12,459.96)*(365/13 days)

Position Closed in Bristol-Myers Squibb Co.

This morning, the Covered Calls Advisor decided to close the existing Bristol-Myers Squibb Co. (ticker symbol BMY) Covered Calls position. The next quarterly earnings is this Thursday and it was determined that not holding the position on the earnings date was the most prudent decision, so the position was closed out.  This BMY holding was the one July 19th, 2019 Covered Calls position in the Covered Calls Advisor Portfolio that was not assigned at options expiration last Friday.     

As detailed below, the result was a +0.6% absolute return-on-investment (equivalent to +8.2% on an annualized basis) for the 26 days this position was held.


Bristol-Myers Squibb Co. (BMY) -- Covered Calls Position Closed

The buy/write transaction was:
06/26/2019 Bought 200 Bristol-Myers shares @ $45.08
06/26/2019 Sold 2 BMY 7/19/2019 $44.00 Call options @ $1.47
Note: the Open Interest in these Call options was 223 contracts and the Implied Volatility was 23.8 when this transaction was executed.
07/03/2019 Quarterly ex-dividend of $.41 per share
07/19/2019 BMY shares closed at $43.33 which was below the $44.00 strike price, so Call options expired and 200 shares of BMY stock were retained in the Covered Calls Advisor Portfolio
07/22/2019 Sold 200 shares BMY stock at $43.48 to close out position

The overall performance result (including commissions) for this Bristol-Myers Covered Calls position was as follows:
Covered Calls Cost Basis: $8,728.29
= ($45.08 - $1.47) * 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$294.00
= ($1.47 * 200 shares)

(b) Dividend Income: +$82.00
= ($.41 dividend per share x 200 shares)

(c) Capital Appreciation: -$324.95
+($43.48 -$45.08)* 200 shares - $4.95 commissions

Total Net Profit: +$51.05

= (+$294.00 options income +$82.00 dividend income -$324.95 capital appreciation)

Absolute Return: +0.6%

= +$51.05/$8,728.29

Annualized Return: +8.2%

= (+$51.05/$8,728.29)*(365/26 days)

July 19th, 2019 Options Expiration Results

The Covered Calls Advisor Portfolio had five July 19th, 2019 Covered Call positions.

• Two Covered Calls positions were assigned early (on the day prior to their ex-dividend dates) and were closed out at a profit prior to this month's July 19th options expiration date.  The detailed results for both of these positions were provided on this blog on the same day they were closed: (1) Bristol-Myers Squibb Co. (BMY) -- See link; and (2) JPMorgan Chase & Co. (JPM) -- See link.

• Two Covered Calls positions (AerCap Holdings NV and Alibaba Group Holdings Ltd.) closed in-the-money on the July 19th options expiration date yesterday, so those shares were assigned (sold) at their respective strike prices.  The details of these positions including their return-on-investment results are shown below.

• One Covered Call position in Bristol-Myers Squibb Co. closed out-of-the-money (stock price below the strike price) at the July 19th, 2019 options expiration.  So, the two BMY Call options expired and the 200 shares remain in the Covered Calls Advisor Portfolio.  A decision will be made soon to either sell the shares or to continue the Covered Calls position by selling August 16th, 2019 Call options against the shares currently held.  Since there is an upcoming earnings report on July 25th, most likely the shares will be sold to avoid the uncertainty that accompanies quarterly earnings reports.  Regardless, the transactions and return-on-investment results for this BMY position will be posted on this blog site on the same day the transactions occur.

All 36 positions that have been closed out so far in 2019 achieved a profit.  The weighted average annualized return on investment for these positions is +42.7%.  This compares to a year-to-date annualized return on investment of +34.2% for the benchmark S&P 500 index.


1.  AerCap Holdings NV (AER) -- Covered Calls Position Closed
The transactions were:
7/03/2019 Bought 200 shares of AerCap Holdings @ $50.56 per share 
7/03/2019 Sold 2 AER July 19th, 2019 $50.00 Call options @ $1.30 per share
Note: This was a simultaneous buy/write transaction.  Also, there is no earnings report prior to the options expiration date.
07/19/2019  The 2 AER July 19th $50.00 Call options closed in-the-money (with the $50.86 stock price above the $50.00 strike price), so 200 shares of AerCap stock sold at $50.00 strike price.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $9,858.29
= ($50.56 - $1.30)* 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$260.00
= ($1.30 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$116.95
= ($50.00 -$50.56) * 200 shares - $4.95 commission

Potential Total Net Profit: +$143.05
= (+$260.00 options income +$0.00 dividend income -$116.95 capital appreciation)

Absolute Return: +1.5%
= +$143.05/$9,858.29
Equivalent Annualized Return: +31.2%
= (+$143.05/$9,858.29)*(365/17 days)


2.  Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed

The transactions were as follows:
07/05/2019 Bought 200 shares of Alibaba stock @ $173.38 per share 
07/05/2019 Sold 2 Alibaba July 19th, 2019 $167.50 Call options @ $7.43 per share
Note: this was a simultaneous Buy/Write transaction
07/19/2019 The 2 BABA July 19th $167.50 Call options closed in-the-money (the $172.99 stock price above the $167.50 strike price), so 200 shares of Alibaba stock sold at $167.50 strike price.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $33,196.29
= ($173.38 - $7.43) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$1,486.00
= ($7.43 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation: -$1,180.95
= ($167.50 -$173.38) * 200 shares - $4.95 commission

Total Net Profit: +$305.05
= (+$1,486.00 options income +$0.00 dividend income -$1,180.95 capital appreciation)

Absolute Return: +0.9%
= +$305.05/$33,196.29
Equivalent Annualized Return: +22.4%
= (+$305.05/$33,196.29)*(365/15 days)

Covered Calls Established in Morgan Stanley

Yesterday, a Covered Calls position was established in Morgan Stanley (ticker MS) for the August 16th, 2019 expiration and at the $42.00 strike price when the stock was at $43.83.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Slightly Bearish, a relatively conservative slightly in-the-money position was established.

There is an upcoming ex-dividend of $.35 on July 30th which is included in the analysis below.  This investment is very similar to the Goldman Sachs investment in the Covered Calls Advisor Portfolio last month using a dividend capture strategy.  Selling in-the-money or near-the-money monthly Covered Calls using this dividend capture strategy for the six biggest U.S. money center banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo) each month (JPMorgan for Jan, Apr, July, and Oct options expirations; Citigroup, Morgan Stanley, and/or Wells Fargo for Feb, May, Aug, and Nov expirations; and Bank of America and/or Goldman Sachs for Mar, Jun, Sep, and Dec expirations) should result in approximately a +6.0% higher annualized return than would be achieved with Covered Calls in these same stocks during non-ex-dividend months.    

As detailed below, two potential outcomes for this investment are: (1) +1.1% absolute return-on-investment for the next 13 days (equivalent to +32.0% on an annualized return basis) if Morgan Stanley stock is assigned on July 29th (the day prior to the July 30th ex-dividend date); OR
(2) +2.0% absolute return-on-investment for the next 31 days (equivalent to +23.3% on an annualized return basis) if Morgan Stanley stock closes above the $42.00 strike price on the August 16th options expiration date.

Morgan Stanley (MS) -- New Covered Calls Position
The transactions were:
07/17/2019 Bought 300 shares of Morgan Stanley stock @ $43.83 per share 
07/17/2019 Sold 3 MS August 16th, 2019 $42.00 Call options @ $2.32 per share
07/30/2019 Upcoming ex-dividend of $.35 per share
Note: The Open Interest in these Calls was 447 contracts and the Implied Volatility was 27.6

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $12,459.96
= ($43.83 - $2.32)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$696.00
= ($2.32* 300 shares)
(b) Dividend Income (If Morgan Stanley stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): +$0.00; OR
(b) Dividend Income (If Morgan Stanley stock closes above the $42.00 strike price on the August 16th options expiration date): +$105.00
= $.35 per share * 300 shares 
(c) Capital Appreciation (If Morgan Stanley stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): -$553.95
= ($42.00 -$43.83)* 300 shares - $4.95 commission; OR
(c) Capital Appreciation (If Morgan Stanley stock is above $42.00 strike price at August 16th expiration): -$553.95
= ($42.00 -$43.83)* 300 shares - $4.95 commission

1.  Potential Total Net Profit (If MS stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): +$142.05
= (+$696.00 options income +$0.00 dividend income -$553.95 capital appreciation)
2.  Potential Total Net Profit (If MS stock assigned at August 16th expiration): +$247.05
= (+$696.00 options income +$105.00 dividend income -$553.95 capital appreciation)

1.  Absolute Return (If MS stock is assigned on July 29th (the day prior to the July 30th ex-dividend date): +1.1%
= +$142.05/$12,459.96
Equivalent Annualized Return: +32.0%
= (+$142.05/$12,459.96)*(365/13 days); OR
2.  Absolute Return (If MS stock assigned at $42.00 strike price at options expiration): +2.0%
= +$247.05/$12,459.96
Equivalent Annualized Return: +23.3%
= (+$247.05/$12,459.96)*(365/31 days)

The downside 'breakeven price' at expiration is at $41.16 ($43.83 - $2.32 - $.35), which is 6.1% below the current market price of $43.83.  This is good downside protection for this Morgan Stanley Covered Calls position given the potential +23.3% annualized ROI for this investment.

Covered Calls Established in Lowe's Companies Inc.

Today, a Covered Calls position was established in Lowe's Companies Inc. (ticker symbol LOW) with an August 16th, 2019 expiration and at the $100.00 strike price.  This position has an upcoming quarterly ex-dividend on July 23rd of $.55 per share, so the potential return for this position, as detailed below, includes the possibility of early exercise since the ex-dividend is prior to the August 16th, 2019 options expiration date.  It is also noted that quarterly earnings will be reported after the options expiration date.  Given the Covered Calls Advisor's current Overall Market Meter indicator of Slightly Bearish, an in-the-money Covered Calls position was established. 

As detailed below, a potential return-on-investment result is +0.8% absolute return (equivalent to +58.5% annualized return for the next 5 days) if the stock is assigned early (last trading day prior to July 23rd ex-date); OR +1.4% absolute return (equivalent to +16.5% annualized return over the next 30 days) if the stock is assigned on the August 16th options expiration date.


Lowe's Companies Inc. (LOW) -- New Covered Calls Position

Although unlikely, if the current time value (i.e. extrinsic value) of $.82 = [$4.31 options premium - ($103.49 stock price - $100.00 strike price)] remaining in the two short Call options decays substantially (down to about $.15 or less) by July 22nd (the last trading day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 200 Bristol-Myers shares away to capture the dividend payment.

The buy/write transaction was:
07/18/2019 Bought 200 Lowe's Companies Inc. shares @ $103.49
07/18/2019 Sold 2 Lowe's 8/16/2019 $100.00 Call options @ $4.31
Note: the Open Interest in these Call options was 409 contracts and the Implied Volatility was 21.9 when this transaction was executed.
07/23/2019 Upcoming quarterly ex-dividend of $.55 per share

Two possible overall performance results (including commissions) for this Lowe's Companies Inc. Covered Calls position are as follows:
Covered Calls Cost Basis: $19,842.29
= ($103.49 - $4.31) * 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$862.00
= ($4.31 *200 shares)
(b) Dividend Income (If option exercised early on July 22nd, the business day prior to July 23rd ex-div date): +$0.00; or
(b) Dividend Income (If Lowe's shares assigned at August 16th, 2019 expiration): +$110.00
= ($.55 dividend per share x 200 shares)

(c) Capital Appreciation (If LOW shares assigned early on July 22nd): -$702.95
+($100.00 -$103.49)* 200 shares - $4.95 commissions; or
(c) Capital Appreciation (If Lowe's shares assigned at $44.00 strike price at options expiration): -$702.95
+($100.00 -$103.49)* 200 shares - $4.95 commissions

1. Total Net Profit [If option exercised on July 22nd (business day prior to July 23rd ex-dividend date)]: +$159.05

= (+$862.00 options income +$0.00 dividend income -$702.95 capital appreciation); or

2. Total Net Profit (If Lowe's shares assigned at $100.00 at August 16, 2019 expiration): +$269.05

= (+$862.00 options income +$110.00 dividend income -$702.95 capital appreciation)

1. Absolute Return (If Lowe's option exercised early): +0.8%

= +$159.05/$19,842.29

Annualized Return: +58.5%

= (+$159.05/$19,842.29)*(365/5 days); or

2. Absolute Return (If Lowe's shares assigned at $100.00 at August 16th, 2019 expiration): +1.4%

= +$269.05/$19,842.29

Annualized Return: +16.5%

= (+$269.05/$19,842.29)*(365/30 days)

These returns will be achieved as long as the stock is above the $100.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $98.63 ($103.49 -$4.31 -$.55) provides 4.7% 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, ten of the eleven criteria are achieved for this Lowe's Companies Inc. Covered Calls position.  The one criteria not achieved is the 16.5% annualized roi being below the desired 20.0% minimum threshold.  Historically, the Covered Calls Advisor's minimum threshold for potential annualized roi is 20.0%, however with the current Volatility Index (VIX) well below its historic average, this objective is being (hopefully temporarily) reduced to 15.0%.

Established New Position in CommScope Holdings Co. Inc.

Today, five August 16th, 2019 CommScope Holdings Co. Inc. (ticker COMM) Put options were sold at the $15.00 strike price for a very generous $.80 per share.  This corresponds to an implied volatility of 51.8 which is a significantly higher than expected given the current low level of 13.05 for the volatility index of the S&P 500, even when consideration is given to the fact that we would expect the implied volatility of CommScope options to be somewhat higher than average given that the next quarterly earnings report on August 8th is prior to the options expiration date.   

CommScope is a global supplier of telecommunications and networking equipment infrastructure.  In closing its acquisition of Arris International (including its subsidiary Ruckus Networks) in April 2019, it has positioned itself for a turnaround from slightly declining sales and profits the past two years to a likely growth trajectory this year and beyond.  Current valuation metrics are at historic lows, so the opportunity to revert to higher valuations is likely.  Of the thirteen analysts covering CommScope, ten rate is as Buy or Outperform, three rate it a Hold, and none rate it a Sell, and their average 1-Year price target is $25.  Finally, the CEO and CFO have been constructive and confident in their comments about the acquisition and their company's future prospects.         

As detailed below, there is potential for a +5.2% absolute return in 38 days (equivalent to a +50.2% annualized return-on-investment).

CommScope Holdings Co. Inc. (COMM) -- New 100% Cash-Secured Puts Position
Selling 100% Cash-Secured Puts is synthetically equivalent to Covered Calls (when executed at the identical strike price and options expiration date).  In this case, Puts were chosen because of their better options liquidity (and thus tighter bid/ask spread).  The open interest at the $15.00 strike price for the Puts was 942 contracts but only 31 for their counterpart Call options.     

The transaction was as follows:
07/10/2019  Sold 5 COMM August 16th, 2019 $15.00 100% Cash-Secured Put options @ $.80
Note: the price of CommScope stock was $15.56 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the five Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $7,500.00
= $15.00* 500 shares

Net Profit:
(a) Options Income: +$391.70
= ($.80* 500 shares) - $8.30 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CommScope stock is above $15.00 strike price at Aug 19,2019 expiration): +$0.00
= ($15.00-$15.00)* 500 shares

Total Net Profit (If COMM stock price is above $15.00 strike price at Aug 19th options expiration): +$391.70
= (+$391.70 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return: +5.2%
= +$391.70/$7,500.00
Annualized Return: +50.2%
= (+$391.70/$7,500.00)*(365/38 days)

The downside 'breakeven price' at expiration is at $14.20 ($15.00 - $.80), which is 8.7% below the current market price of $15.56.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the August 19th options expiration) for this CommScope short Puts position is 62.0%. This compares with a probability of profit of 50.4% for a buy-and-hold of CommScope shares over the same time period. Using this probability of profit of 62.0%, the expected value annualized return-on-investment (if held until expiration) is +31.1% (+50.2% * 62.0%), a very attractive risk/reward profile for this relatively conservative investment.  

Established Covered Calls in AerCap Holdings and Alibaba

Two new Covered Calls positions have been established in AerCap Holdings NV (ticker AER) and Alibaba Group Holding Ltd.(BABA) with July 19th, 2019 options expiration dates. Two AerCap Holdings Call options were sold at $1.30 for the $50.00 strike price when the stock price was $50.56 and 200 shares of BABA were purchased at $173.38 while two Calls were sold at $7.43 at the $167.50 strike price.

As detailed below, the potential return-on-investment results are: 

• AerCap Holdings: +1.5% absolute return in 17 days (equivalent to a +31.2% annualized return-on-investment); and

• Alibaba Group Holdings Ltd.: +0.9% absolute return in 15 days (equivalent to a +22.4% annualized return-on-investment) 

1. AerCap Holdings NV (AER) -- New Covered Calls Position
Here is a thoughtful analysis of airplane leasing companies (including AerCap):  link

The transactions were:
7/03/2019 Bought 200 shares of AerCap Holdings @ $50.56 per share 
7/03/2019 Sold 2 AER July 19th, 2019 $50.00 Call options @ $1.30 per share
Note: This was a simultaneous buy/write transaction.  Also, there is no earnings report prior to the options expiration date.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $9,858.29
= ($50.56 - $1.30)* 200 shares + $6.29 commissions

Net Profit Components:
(a) Options Income: +$260.00
= ($1.30 * 200 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If AerCap Holdings shares are above $50.00 strike price at July 19th expiration): -$116.95
= ($50.00 -$50.56) * 200 shares - $4.95 commission

Potential Total Net Profit (If AerCap Holdings stock assigned at expiration): +$143.05
= (+$260.00 options income +$0.00 dividend income -$116.95 capital appreciation)

Absolute Return: +1.5%
= +$143.05/$9,858.29
Equivalent Annualized Return: +31.2%
= (+$143.05/$9,858.29)*(365/17 days)


2. Alibaba Group Holding Ltd. (BABA) -- New Covered Calls Position

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.   

The transactions were as follows:
07/05/2019 Bought 200 shares of Alibaba stock @ $173.38 per share 
07/05/2019 Sold 2 Alibaba July 19th, 2019 $167.50 Call options @ $7.43 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: $33,196.29
= ($173.38 - $7.43) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$1,486.00
= ($7.43 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $167.50 strike price at July 19th expiration): -$1,180.95
= ($167.50 -$173.38) * 200 shares - $4.95 commission

Total Net Profit: +$305.05
= (+$1,486.00 options income +$0.00 dividend income -$1,180.95 capital appreciation)

Absolute Return: +0.9%
= +$305.05/$33,196.29
Equivalent Annualized Return: +22.4%
= (+$305.05/$33,196.29)*(365/15 days)

The downside 'breakeven price' at expiration is at $165.95 ($173.38 - $7.43), which is 4.3% below the current market price of $173.38.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the July 19th, 2019 options expiration) for this Alibaba Covered Calls position is 75.4%, so the expected value annualized ROI of this investment (if held until expiration) is +16.9% (+22.4% * 75.4%), a satisfactory result for this moderately in-the-money Covered Calls position, especially since there is no earnings report prior to the options expiration date.

Early Assignment of JPMorgan Chase & Co. Covered Calls

Early this morning I received email and text notifications from my broker (Schwab) that all 3 JPMorgan Chase & Co. (ticker symbol JPM) Call options were exercised early, so the 300 shares of JPM stock in the Covered Calls Advisor Portfolio were assigned (i.e. sold) at the $105.00 strike price. 

Details of the transactions and the results for this JPMorgan Chase position are provided below.  The per share price had increased from $107.86 when the position was originally established (on June 25th) to $113.00 at yesterday's market close.  The time value remaining in the Call options (based on the $8.80 midpoint of the $8.70/$8.90 bid/ask spread at the market close yesterday) was $.80 [$8.80- ($113.00 - $105.00)].  The Call owner exercised their option to buy the shares at the $105.00 strike price in order to capture the dividend.  This outcome was somewhat surprising because the Call owner decided to forego the $.80 time value remaining in the Call option to capture today's $.80 ex-dividend per share despite the fact that the JPM stock price declines by the $.80 dividend amount at market open today. 

There are two reasons that I preferred this outcome (i.e. early assignment) instead of keeping the covered calls position and capturing today's $.80 per share ex-dividend:

• Early assignment resulted in a significantly higher annualized return-on-investment (41.2% achieved) rather than if the position had instead been assigned on the July 19th options expiration date which (including the $.80 per share dividend) would have resulted in a 26.1% annualized ROI; and
• JPMorgan Chase & Co. will report their 2nd quarter earnings on July 16th which is prior to the July 19th options expiration date.  Because of the increased uncertainty associated with earnings reports, the Covered Calls Advisor prefers to avoid holding positions on earnings reporting days.

The Covered Calls Advisor will retain the cash received in the Covered Calls Advisor Portfolio until a new Covered Calls position is established.  As always, the transactions details will be posted on this blog site the same day that they occur.

The detailed results for this JPMorgan position are provided below.

JPMorgan Chase & Co. -- Early Assignment of JPMorgan Covered Calls

The transactions were:
06/25/2019 Bought 300 JPM shares @ $107.86
06/25/2019 Sold 3 JPM 7/19/2019 $105.00 Call options @ $3.94
Note: a simultaneous buy/write transaction was executed.
07/02/2019 Early exercise of 3 JPM July 19th, 2019 $105.00 Call options, so 300 JPM shares assigned at $105.00 strike price.

The overall performance results (including commissions) for this JPM Covered Calls position are as follows:
Stock Purchase Cost: $31,180.95
= ($107.86 - $3.94) *300 shares + $4.95 commission

Net Profit:
(a) Options Income: +$1,179.99
= ($3.94 *300 shares) - $2.01 commissions
(b) Dividend Income (Call options exercised early on July 2nd, the business day prior to July 3rd ex-div date): +$0.00

(c) Capital Appreciation: -$862.95
+($105.00 -$107.86)*300 shares - $4.95 commissions

Total Net Profit: +$317.04

= (+$1,179.99 +$0.00 -$862.95)

Absolute Return: +1.0%

= +$317.04/$31,180.95

Annualized Return (If option exercised early): +41.2%

= (+$317.04/$31,180.95)*(365/9 days)

Early Assignment of Bristol-Myers Covered Call Position

This morning, the Covered Calls Advisor received notification from my broker (Schwab) that one Bristol-Myers Squibb Co. (BMY) July 19th, 2019 Call option was exercised early, so 100 shares of Bristol-Myers stock were assigned (i.e. sold) at the $44.00 strike price.  The Covered Calls Advisor Portfolio was long 300 shares and short 3 July 19th $44.00 Call options, so (as shown in the right sidebar), 200 BMY shares and 2 short Calls remain in the portfolio and will likely stay there until the July 19th expiration date.

Today is Bristol-Myers' $.41 per share quarterly ex-dividend date.  This BMY Covered Calls position was established on June 26th, 2019 when the stock was purchased at $45.08 per share (link to blog post when Bristol-Myers position was established).  The price has since risen to $46.27 at yesterday's market close.  In the original blog post, the Covered Calls Advisor stated: "If the current time value (i.e. extrinsic value) of $.39 = [$1.47 options premium - ($45.08 stock price - $44.00 strike price)] remaining in the three short Call options decays substantially (down to about $.10 or less) by July 2nd (the last trading day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 300 Bristol-Myers shares away to capture the dividend payment. Yesterday, the remaining time value was $0.40, so I was somewhat surprised that a BMY Call owner would immediately forego the $.40 time value remaining in the Call option to capture today's $.41 ex-dividend per share, given that the stock price declines by the $.41 dividend amount at market open today.  Nevertheless, this is a satisfactory outcome since the annualized return-on-investment result achieved of +34.9% exceeds the +27.5% that would have occurred if the stock had instead been assigned at the July 19th options expiration date.  The cash received in the Covered Calls Advisor Portfolio will be retained until a new Covered Calls position is established, the transactions details of which will be posted on this blog the same day they occur.

The detailed results for this position are provided below. 


Bristol-Myers Squibb Co. (BMY) -- Early Assignment of one BMY Covered Call Position

The buy/write transaction was:
06/26/2019 Bought 300 Bristol-Myers shares @ $45.08
06/26/2019 Sold 3 BMY 7/19/2019 $44.00 Call options @ $1.47
Note: the Open Interest in these Call options was 223 contracts and the Implied Volatility was 23.8 when this transaction was executed.
07/02/2019 One BMY 7/19/2019 Call option exercised, so 100 BMY shares sold at the $44.00 strike price

The performance results (including commissions) for this Bristol-Myers Covered Calls position are as follows:
Covered Calls Cost Basis: $4,363.32
= ($45.08 - $1.47) * 100 shares + $6.96/3 commissions

Net Profit Components:
(a) Options Income: +$146.33
= ($1.47 *100 shares) - $.67 commission
(b) Dividend Income (One Call option exercised early on July 2nd): +$0.00

(c) Capital Appreciation (100 BMY shares assigned early on July 2nd): -$112.95
+($44.00 -$45.08)*100 shares - $4.95 commissions

Total Net Profit: +$33.38

= (+$146.33 options income +$0.00 dividend income -$112.95 capital appreciation)

Absolute Return: +0.8%

= +$33.38/$4,363.32

Annualized Return: +34.9%

= (+$33.38/$4,363.32)*(365/8 days); or