Covered Calls Position Established in Alibaba Group Holdings Ltd.

A new Covered Calls position has been established in Alibaba Group Holdings (ticker BABA) with a May 15th, 2020 options expiration date. Two Alibaba Call options were sold at $11.97 at the $185.00 strike price when the stock price was $193.93.  A moderately in-the-money strike price was chosen because of the Covered Calls Advisor's Overall Market Meter outlook of Bearish.

As detailed below, the potential return-on-investment results are +1.7% absolute return in 15 days (equivalent to a +40.7% annualized return-on-investment).  This is an attractive potential return given that a moderately in-the-money strike price was selected.


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

The transactions were as follows:
05/01/2020 Bought 200 shares of Alibaba stock @ $193.93 per share 
05/01/2020 Sold 2 Alibaba May 15th, 2020 $185.00 Call options @ $11.97 per share
Note: this was a simultaneous Buy/Write transaction.  The Implied Volatility of the Call options was 42.4 when this transaction was executed.  This high Implied Volatility is higher than would normally be the case because of the added uncertainty caused by Alibaba's quarterly earnings report which is upcoming on May 14th (the day prior to the options expiration).

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $36,394.07
= ($193.93 - $11.97) * 200 shares + $2.07 commission

Net Profit Components:
(a) Options Income: +$2,394.00
= ($11.97 * 200 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If BABA stock is above $185.00 strike price at May 15th expiration): -$1,786.00
= ($185.00 -$193.93) * 200 shares

Total Net Profit: +$608.00
= (+$2,394.00 options income +$0.00 dividend income -$1,786.00 capital appreciation)

Absolute Return: +1.7%
= +$608.00/$36,394.07
Equivalent Annualized Return: +40.7%
= (+$608.00/$36,394.07)*(365/15 days)

The downside 'breakeven price' at expiration is at $181.96 ($193.93 - $11.97), which is 6.2% below the current market price of $193.93.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the May 15th, 2020 options expiration) for this Alibaba Covered Calls position is 69.4%, so the expected value annualized ROI of this investment (if held until expiration) is +28.2% (+40.7% * 69.4%), a good result for this moderately in-the-money Covered Calls position.

The 'crossover price' at expiration is $196.97 = $193.93 + [$11.97 - ($193.93 - $185.00)].
This is the price above which it would have been more profitable to simply buy-and-hold Alibaba stock until the May 15th, 2020 options expiration date rather than establishing this Covered Calls position.