Today, a buy/write limit order in Micron Technology Inc. (ticker MU) was executed at the Covered Calls Advisors' net debit price of $43.58 per share. Three hundred shares were purchased at $47.81 and three October 16th, 2020 Call options were sold for $4.23 at the $45.00 strike price, therefore a time value of $1.42 = [$4.23 option premium - ($47.81 stock price - $45.00 strike price)] per share. Given the Covered Calls Advisor's current cautious Overall Market Meter outlook, a moderately in-the-money Covered Calls position was established -- the Delta was 69.6 which closely approximates the probability that the Call options will be in-the-money on the options expiration date.
As detailed below, the potential return-on-investment result is +3.3% absolute
return in 22 days (equivalent to a +54.1% annualized
return-on-investment).
The Implied Volatility of the Call options sold was very high at 53.7. This elevated level reflects the fact that Micron's 4th quarter earnings report is next Tuesday and the uncertainty related to how the stock might react to the report contributes to this this temporarily inflated volatility. Normally, the Covered Calls Advisor avoids investing in companies with intervening earnings reports. But Micron has been forthright in its communication to the investment community since its last earnings report and it is likely that the realized volatility between now and the Oct 16th options expiration date will be less than it was today when this Micron Covered Calls position was established.
Micron Technology Inc. (MU) -- New Covered Calls Position
The Buy/Write transaction was as follows:
09/25/2020 Bought 300 shares of Micron Technology Inc. stock @ $47.81 per share
09/25/2020 Sold 3 Micron October 16th, 2020 $45.00 Call options @ $4.23 per share
A possible overall performance results (including commissions) if the stock price is above the $45.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $13,076.01
= ($47.81 - $4.23) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$1,269.00
= ($4.23 * 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron stock is above $45.00 strike price at October 16th expiration): -$843.00
= ($45.00 - $47.81) * 300 shares
Total Net Profit: +$426.00
= (+$1,269.00 options income +$0.00 dividend income -$843.00 capital appreciation)
Absolute Return: +3.3%
= +$426.00/$13,076.01
Equivalent Annualized Return: +54.1%
= (+$426.00/$13,076.01)*(365/22 days)
The
downside 'breakeven price' at expiration is at $43.58 ($47.81 - $4.23),
which is 8.8% below the current market price of $47.81.
