A Covered Calls position in Alibaba Group Holdings Ltd. (ticker BABA) was closed out profitably last Friday since the stock was in-the-money at the options expiration date. The Covered Calls Advisor wants to continue a position in Alibaba, so this morning a new position was established. One February 26th, 2021 100% Cash-Secured Put option was sold at the $250.00 strike price at $3.10 per share when the price of Alibaba stock was $263.01 (5.2% above the strike price). This is a moderately conservative position since the probability of assignment on the options expiration date was 74.9% when this position was established.
A Cash-Secured Put option was sold instead of its comparable Covered Call in this case. The Open Interest in the Puts was 2,301 contracts versus a much lower 566 for the Calls and likewise, the Bid/Ask spread on the Puts was only $.35 per share versus $.80 for the Calls, so the Covered Calls Advisor determined that there was a greater likelihood that a Cash-Secured Put limit order at $3.10 would be executed compared with a Covered Call with an identical $3.10 time value.
The 34.2 Implied Volatility for the Put option was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 21.8 -- so the $3.10 Put option price was a nice premium to receive for this out-of-the-money
(i.e. strike price below the current stock price) Put
option. Also important to the Covered Calls Advisor, there is no earnings report prior to the February 26th, 2021 options expiration date.
As detailed below, for this Alibaba Cash-Secured Puts position there is potential for a +1.3% absolute
return in 19 days (equivalent to a +24.1% annualized
return-on-investment).
Alibaba Group Holdings Ltd. (BABA) -- New 100% Cash-Secured Put Position
The transaction today was as follows:
02/08/2021 Sold 1 Alibaba February 26th, 2021 $250.00 100% Cash-Secured Put option @ $3.10 per share.
The Covered Calls Advisor does not use margin, so the detailed
information on this position and the potential result detailed below
reflect that this position was established using 100% cash
securitization for the one Put option sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Cost Basis: $24,690.67
= ($250.00 - $3.10) * 100 shares + $.67 commission
Net Profit:
(a) Options Income: +$309.33
= ($3.10 * 100 shares) - $.67 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA is above $250.00 strike price at the Feb. 26th expiration): +$0.00
= ($250.00 - $250.00) * 100 shares
Total Net Profit (If Alibaba stock price is above $250.00 strike price at options expiration): +$309.33
= (+$309.33 option income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Alibaba is above $250.00 strike price at the Feb. 26th options expiration) : +1.3%
= +$309.33/$24,690.67
Annualized Return: +24.1%
= (+$309.33/$24,690.67)*(365/19 days)
The
downside 'breakeven price' at expiration is at $246.90 ($250.00 - $3.10),
which is 6.1% below the current market price of $263.01.
