As detailed below, the potential return-on-investment results are +1.5% absolute return in 18 days (equivalent to a +31.3% annualized return-on-investment). This is an attractive potential return given that a relatively conservative in-the-money strike price was selected.
Alibaba Group Holdings Ltd. (BABA) -- New Covered Call Position
The transactions were as follows:
12/14/2020 Bought 100 shares of Alibaba stock @ $257.80 per share
12/14/2020 Sold 1 Alibaba Dec 31st, 2020 $250.00 Call option @ $11.60 per share
Note: this was a simultaneous Buy/Write transaction. The Implied Volatility of the Call options was 30.5 when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $24,620.67
= ($257.80 - $11.60) * 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: +$1,160.00
= ($11.60 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA stock is above $250.00 strike price at Dec 31st, 2020 expiration): -$780.00
= ($250.00 -$257.80) * 100 shares
Total Net Profit: +$380.00
= (+$1,160.00 Call option income +$0.00 dividend income -$780.00 capital appreciation)
Absolute Return: +1.5%
= +$380.00/$24,620.67
Equivalent Annualized Return: +31.3%
= (+$380.00/$24,620.67)*(365/18 days)
The
downside 'breakeven price' at expiration is at $246.20 ($257.80 - $11.60),
which is 4.5% below the current market price of $257.80.
