- Alibaba Group Holdings Ltd. (BABA) -- +4.2% absolute return (equivalent to +28.8% annualized roi) for the 53 days of this investment
- DraftKings Inc. (DKNG) -- +10.6% absolute return (equivalent to +68.2% annualized roi) for the 57 days of this investment
- Facebook Inc. (FB) -- +4.7% absolute return (equivalent to +59.0% annualized roi) for the 29 days of this investment
- Morgan Stanley (MS) -- +1.8% absolute return (equivalent to +40.2% annualized roi) for the 16 days of this investment
The cash now available will be retained until new Covered Calls and/or
100%
Cash-Secured Puts positions are established. These four positions demonstrate that very good return-on-investment results can be achieved with conservative (i.e. moderately in-the-money) Covered Call positions. Given the Covered Calls
Advisor's currently cautious Overall Market outlook, new positions will
be hedged by continuing to establish Covered Calls at moderately in-the-money
strike prices with good downside protection (that usually being with Deltas greater than 70). However, given the S&P 500 Volatility Index (VIX) at a level of 21.2 today, newly established positions will likely provide slightly lower return-on-investment potential when compared with the results achieved by the four positions that expired today.
From my recent readings, here are two historical charts that provide a good visual explanation for my current cautious sentiment:
1. Warren Buffett's favorite overall stock market indicator shows that over the past 68 years, only in the dot.com bubble in 2000 was the market more overvalued than it is now. The P/E ratio then was 43 then and reached its low of 14.5 10 years later. Note: the current S&P 500 ratio is 34.
2. Investors are now more leveraged than ever before in our modern history. A correction in the stock market can be exacerbated by margin calls by over-leveraged investors.
1. Alibaba Group Holdings Ltd. (BABA) -- Covered Call Position Closed at Option Expiration
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.
12/31/2020 BABA Call option expired since stock closed below the strike price
01/05/2021 Sold 1 BABA Jan. 15th, 2021 $240.00 Call option at $5.50 against the 100 shares of Alibaba stock to continue the Alibaba Covered Call position.
Note: the price of BABA was $237.02 today when this Call option was sold.
01/15/2021 Roll-Up-and-Out transaction: Bought-to-Close 1 BABA Jan. 15th, 2021 $240.00 Call option at $3.05 per share and simultaneously Sold-to-Open 1 BABA February 5th, 2021 $245.00 Call at $9.05 per share. This roll-up-and-out transaction occurred at a net credit of $6.00 ($9.05 - $3.05) per share and the price of BABA stock was $242.95 when this transaction was executed.
02/05/2021 Today's $245.00 Call option expired in-the-money (stock closed at $265.73 per share), so the 100 BABA shares were assigned (i.e. sold) at the $245.00 strike price.
The overall performance result (including commissions) was as follows:
Covered Call Cost Basis: $24,620.67
= ($257.80 - $11.60) * 100 shares
Net Profit Components:
(a) Option Income: +$2,310.00
= ($11.60 + $5.50 +$9.05 - $3.05) * 100 shares - $7.00 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (BABA stock is above $245.00 strike price at Feb. 5th, 2021 expiration): -$1,280.00
= ($245.00 assignment price -$257.80 stock purchase price) * 100 shares
Total Net Profit: +$1,030.00
= (+$2,310.00 Call option income +$0.00 dividend income -$1,280.00 capital appreciation)
Absolute Return: +4.2%
= +$1,030.00/$24,620.67
Equivalent Annualized Return-on-Investment: +28.8%
= (+$1,030.00/$24,620.67) * (365 days/53 days)
2. DraftKings Inc. (DKNG) -- Covered Calls Position Closed at Options Expiration
The simultaneous buy/write transaction was as follows:
12/10/2020 Bought 300 shares of Draftkings Inc. stock @ $48.80 per share
12/10/2020 Sold 3 Draftkings January 15th, 20210 $45.00 Call options @ $6.56 per share
Note: the Delta of these Calls was 68.0, which approximates the probability that the Calls will expire in-the-money at the Jan 15th options expiration.
01/15/2021 Roll-Out-and-Up transaction: Bought-to-Close 3 DKNG Jan. 15th, 2021 $45.00 Call options at $8.95 per share and simultaneously Sold-to-Open 3 DKNG February 5th, 2021 $50.00 Calls at $5.70 per share. This roll-up-and-out transaction occurred at a net debit of $3.25 ($8.95 - $5.70) per share and the price of DKNG stock was $53.85 when this transaction was executed.
02/05/2021 Today's $50.00 Call options expired in-the-money (stock closed at $63.84 per share), so the 300 DraftKings shares were assigned (i.e. sold) at the $50.00 strike price.
The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $12,674.01
= ($48.80 - $6.56) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$988.98
= ($6.56 +$5.70 - $8.95) * 300 shares - $4.02 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (DKNG stock was above $50.00 strike price at the Feb.5th, 2021 expiration): +$360.00
= ($50.00 assignment price - $48.80 stock purchase price) * 300 shares
Total Net Profit: +$1,348.98
= (+$988.98 options income +$0.00 dividend income +$360.00 capital appreciation)
Absolute Return: +10.6%
= +$1,348.98/$12,674.01
Equivalent Annualized Return-on-Investment: +68.2%
= (+$1,348.98/$12,674.01)*(365/57 days)
3. Facebook Inc. (FB) -- Covered Call Position Closed at Option Expiration
01/08/2021 Bought 100 Facebook shares @ $266.443
01/08/2021 Sold 1 Facebook 2/05/2021 $265.00 Call option @ $13.31.
02/05/2021 Today's $265.00 Call option expired in-the-money (stock closed at $268.04 per share), so the 100 Facebook shares were assigned (i.e. sold) at the $265.00 strike price.
The overall performance result (including commissions) for this Facebook Inc. Covered Call position was as follows:
Covered Call Cost Basis: $25,313.97
= ($266.443 - $13.31) * 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: +$1,331.00
= ($13.31 * 100 shares)
(b) Dividend Income: +$0.00
= +($265.00 - $266.443) * 100 shares
4. Morgan Stanley (MS) -- Covered Calls Position Closed at Options Expiration
The buy/write transaction was:
01/21/2021 Bought 200 Morgan Stanley shares @ $74.4901/21/2021 Sold 2 Morgan Stanley 02/05/2021 $73.00 Call options @ $2.41
Note: the Time Value (aka Extrinsic Value) in the Call options was $.92 per share = [$2.41 Call options premium - ($74.49 stock price - $73.00 strike price)]
01/28/2021 Quarterly ex-dividend of $.35 per share
02/05/2021 Today's $73.00 Call options expired in-the-money (stock closed at $73.21 per share), so the 200 Morgan Stanley shares were assigned (i.e. sold) at the $73.00 strike price.
The overall performance result (including commissions) for this Morgan Stanley Covered Calls position are as follows:
Covered Calls Cost Basis: $14,417.34
= ($74.49 - $2.41) * 200 shares + $1.34 commission
Net Profit Components: (Morgan Stanley shares assigned at $73.00 strike price at February 5th, 2021 expiration)
(a) Options Income: +$482.00
= ($2.41 * 200 shares)
(b) Dividend Income (Morgan Stanley stock assigned at Feb. 5th, 2021 expiration): +$70.00
= ($.35 dividend per share x 200 shares)
+($73.00 - $74.49) * 200 shares
Please email me at partlow@cox.net with any questions or comments related specifically to this post or whenever you have comments or questions related to Covered Calls investing.
Best Wishes and Godspeed,
Jeff Partlow
