Covered Calls Established in Alibaba Group and Cigna Corp.

Two new Covered Calls positions have been established in Alibaba Group Holding (ticker BABA) and Cigna Corp. (CI) with October 18th, 2019 options expiration dates. Two Alibaba Call options were sold at $8.25 for the $170.00 strike price when the stock price was $175.09 and 200 shares of Cigna were purchased at $149.92 while two Calls were sold at $7.68 at the $145.00 strike price.  Neither company has an earnings report prior to the expiration date.

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

• Alibaba Group Holding : +1.9% absolute return in 23 days (equivalent to a +29.8% annualized return-on-investment); and

• Cigna Corp. : +1.9% absolute return in 23 days (equivalent to a +30.5% annualized return-on-investment) 

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

The transactions were as follows:
09/26/2019 Bought 200 shares of Alibaba stock @ $175.09 per share 
09/26/2019 Sold 2 Alibaba October 18th, 2019 $170.00 Call options @ $8.25 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 30.1 when this transaction was executed.  As detailed below, this high Implied Volatility provides for an immediate generous income credit of $3,720 from selling these 2.9% in-the-money Call options.

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $33,374.29
= ($175.09 - $8.25) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$1,650.00
= ($8.25 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $170.00 strike price at Oct 18th expiration): -$1,022.95
= ($170.00 -$175.09) * 200 shares - $4.95 commission

Total Net Profit: +$627.05
= (+$1,650.00 options income +$0.00 dividend income -$1,022.95 capital appreciation)

Absolute Return: +1.9%
= +$627.05/$33,374.29
Equivalent Annualized Return: +29.8%
= (+$627.05/$33,374.29)*(365/23 days)

The downside 'breakeven price' at expiration is at $166.84 ($175.09 - $8.25), which is 4.7% below the current market price of $175.09.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the October 18, 2019 options expiration) for this Alibaba Covered Calls position is 67.0%, so the expected value annualized ROI of this investment (if held until expiration) is +20.0% (+29.8% * 67.0%), a good 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 $178.25 = $175.09 + [$8.25 - ($175.09 - $170.00)].
This is the price at expiration above which it would have been more profitable to simply buy-and-hold Alibaba stock until the Oct. 18th, 2019 options expiration date rather than establishing this Covered Calls position.


2.  Cigna Corp. (CI) -- New Covered Calls Position

Of 23 analysts covering Cigna, 19 rate it as either Buy or Outperform, 4 rate it a Hold, and 0 rate it as either Underperform or Sell.  The 1-year target price of these analysts is $214 which is 42% above the current stock price.  Both Morgan Stanley and Citigroup came out today with Buy recommendations on Cigna and with $208 and $203 price targets respectively.  Both highlighted that Cigna's recent price decline is overdone and a reversal to higher price levels is expected.

The transactions were as follows:
09/26/2019 Bought 200 shares of Cigna stock @ $149.92 per share 
09/26/2019 Sold 2 Cigna Oct 18th, 2019 $145.00 Call options @ $7.68 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: $28,454.29
= ($149.92 - $7.68) * 200 shares + $6.29 commission

Net Profit Components:
(a) Options Income: +$,1536.00
= ($7.678 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Cigna stock is above $145.00 strike price at Oct 18th expiration): -$988.95
= ($145.00 -$149.92) * 200 shares - $4.95 commission

Total Net Profit: +$547.05
= (+$1,536.00 options income +$0.00 dividend income -$988.95 capital appreciation)

Absolute Return: +1.9%
= +$547.05/28,454.29
Equivalent Annualized Return: +30.5%
= (+$547.05/28,454.29)*(365/23 days)

The downside 'breakeven price' at expiration is at $142.24 ($149.92 - $7.68), which is 5.1% below the current market price of $149.92.