Four New Positions Established

Four new positions were established in the Covered Calls Portfolio in Alphabet Inc. (GOOGL), Baidu Inc. (BIDU), iShares Emerging Markets ETF (EEM), and New Oriental Education and Technology Group Inc. (EDU).   All four positions were at the May monthly options expiration date of May 15th, 2020.  Given the Overall Market Meter outlook of Bearish, conservative in-the-money strike prices were selected for each position.    

Since the market has declined significantly the past two days, the VIX has increased from 38.2 at market close last Friday to 47 today.  So, the options premiums now available from selling options (either Covered Calls or 100% Cash-Secured Puts) is very attractive and provide nice potential return-on-investment results, even at moderately in-the-money strike prices.

I continue to track U.S. daily new cases of Covid-19.  The chart below shows that a plateau has been reached and daily new cases are beginning to show signs of declining:

In terms of the Covid-19 spread, the U.S. is several weeks behind East Asia (China, South Korea, etc.).  These countries are gradually now getting back to business in a substantial way, so the positions taken today in BIDU, EEM, and EDU reflect the Covered Calls Advisor's somewhat greater comfort level with these positions at this particular time.  These countries also remain undervalued by most fundamental valuation metrics relative to the U.S., so their stock markets are likely to outperform the U.S. equities markets over the next year.  In addition, as explained in a previous post, U.S. companies have just recently begun their 1st quarter earnings reports, so the Covered Calls Advisor will continue to monitor these reports daily.  Currently, the Covered Calls Advisor Portfolio is more than 50% in cash (money market accounts), so in the days and weeks ahead, as greater clarity on sector, industry, and individual company trends become more apparent, additional positions will be established and will be posted on this blog site whenever they occur.  

As detailed below, the potential return-on-investment results for these four positions are: 

• Alphabet Inc. : +2.3% absolute return in 25 days (equivalent to a +33.0% annualized return-on-investment);
• Baidu Inc. : +2.8% absolute return in 25 days (equivalent to a +41.4% annualized return-on-investment); 
• iShares MSCI Emerging Markets ETF : +1.7% absolute return in 25 days (equivalent to a +25.5% annualized return-on-investment); and
• New Oriental Education and Technology Group Inc. : +3.7% absolute return in 26 days (equivalent to a +51.9% annualized return-on-investment)

1.  Alphabet Inc. (GOOGL) -- New 100% Cash-Secured Put Position

The transaction was as follows:
04/21/2020 Sold 1 GOOGL May 15th, 2020 $1,120.00 100% Cash-Secured Put option @ $25.30 per share 
Note: The Put was sold when the stock was trading at $1,213.85 per share.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $112,000.67
= $1,120.00 per share * 100 shares + $.67 commission

Net Profit Components:
(a) Options Income: +$2,530.00
= ($25.30 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alphabet stock is above $1,120.00 strike price at May 15th expiration): +$0.00
= ($1,120.00 -$1,120.00) * 100 shares

Potential Total Net Profit (If Alphabet stock price is above $1,120.00 strike price at May 15th options expiration): +$2,530.00
= (+$2,530.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.3%
= +$2,530.00/$112,000.67
Equivalent Annualized Return: +33.0%
= (+$2,530.00/$112,000.67)*(365/25 days)



2. Baidu Inc. (BIDU) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
04/21/2020 Sold 3 BIDU May 15th, 2020 $90.00 100% Cash-Secured Put options @ $2.55 per share 
Note: The Puts were sold when the stock was trading at $99.47 per share.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $27,002.01
= $90.00 per share * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$765.00
= ($2.55 * 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Baidu stock is above $90.00 strike price at May 15th expiration): +$0.00
= ($90.00 -$90.00) * 300 shares

Potential Total Net Profit (If BIDU stock price is above $90.00 strike price at May 15th options expiration): +$765.00
= (+$765.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.8%
= +$765.00/$27,002.01
Equivalent Annualized Return: +41.4%
= (+$765.00/$27,002.01)*(365/25 days)



3. iShares Emerging Markets ETF (EEM) -- New Covered Calls Position

The transactions were as follows:
04/21/2020 Bought 500 shares of iShares Emerging Markets ETF @ $34.89 per share 
04/21/2020 Sold 5 EEM May 15, 2020 $32.00 Call options @ $3.45 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: $15,726.75
= ($34.89 - $3.45) * 500 shares + $6.75 commission

Net Profit Components:
(a) Options Income: +$1,725.00
= ($3.45 * 500 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If EEM is above $32.00 strike price at May 15th expiration): -$1,449.95
= ($32.00 - $34.89) * 500 shares - $4.95 commission

Total Net Profit: +$275.05
= (+$1,725.00 options income +$0.00 dividend income -$1,449.95 capital appreciation)

Absolute Return: +1.7%
= +$275.05/$15,726.75
Equivalent Annualized Return: +25.5%
= (+$275.05/$15,726.75)*(365/25 days)

The downside 'breakeven price' at expiration is at $31.44 ($34.89 - $3.45), which is 9.9% below the current market price of $34.89.



4. New Oriental Education and Technology Inc. (EDU) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
04/20/2020 Sold 2 EDU May 15th, 2020 $100.00 100% Cash-Secured Put options @ $3.70 per share 
Notes: The Puts were sold when the stock was trading at $109.46 per share. 

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,001.36
= $100.00 per share * 200 shares + $1.36 commission

Net Profit Components:
(a) Options Income: +$740.00
= ($3.70 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EDU stock is above $100.00 strike price at May 15th expiration): +$0.00
= ($100.00 -$100.00) * 200 shares

Potential Total Net Profit (If New Oriental Education stock price is above $100.00 strike price at May 15th options expiration): +$740.00
= (+$740.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +3.7%
= +$740.00/$20,001.36
Equivalent Annualized Return: +51.9%
= (+$740.00/$20,001.36)*(365/26 days)