At the April 1st, 2021 options expiration date, the Covered
Calls position in Alibaba Group Holdings Ltd. (ticker symbol BABA) expired with
the stock price at $224.36, well below the $242.50 strike price. So, the two Call
options expired and the 200 shares of Alibaba stock were retained in the
Covered Calls Advisor Portfolio. Today, with the Alibaba Group Holdings Ltd. stock price at $225.27, a sell-to-open order was executed to sell 2 April 16th, 2021 Call
options at the $235.00 strike price for $3.00 per share to continue this Covered Calls position.
Alibaba has been a losing position since first established two months ago. It has suffered primarily from government regulation pressure from both monopolistic concerns by China and from U.S. efforts to require that Alibaba conform to U.S. accounting standards or face possible de-listing from American Exchanges. Nevertheless, I believe Alibaba is undervalued at only 19 times next year's earnings given its continuing strong growth potential. Comparing that to forward year P/E multiples for Amazon and WalMart of 66 and 25 respectively, Alibaba has a lot of upside potential if it can weather the current regulatory headwinds.
As detailed below, two potential return-on-investment results for this Alibaba Group Holdings Ltd. position are: (1) -0.9% absolute
return in 61 days (equivalent to a -5.1% annualized
return-on-investment) if the stock price is unchanged at $225.27 at the April 16th, 2021 options expiration; or (2) +3.2% absolute
return in 61 days (equivalent to a +19.2% annualized
return-on-investment) if the stock closes above the $235.00 strike price.
The transactions history is as follows:
2/08/2021 Sold 1 Alibaba 2/26/2021 $250.00 100% Cash-Secured Put option @ $3.10 per share
2/23/2021 Bought 100 shares of Alibaba stock @ $244.92 per share
2/23/2021 Sold 1 Alibaba March 5th, 2021 $235.00 Call option @ $12.84 per share
Note: this was a simultaneous Buy/Write transaction. The Implied Volatility of the Call options was 39.0 when this transaction was executed.
2/26/2021 1 BABA $250.00 Cash-Secured Put option expired out-of-the-money, so 100 shares were purchased at the $250.00 strike price
3/05/2021 1 BABA $235.00 Call option expired out-of-the-money and 100 shares were retained in the Covered Calls Advisor Portfolio
3/09/2021 Sold 2 BABA 3/19/2021 $245.00 Call options @ $4.25 per share against the 200 BABA shares owned.
3/19/2021 2 BABA $245.00 Call options expired out-of-the-money and 200 shares were retained in the Covered Calls Advisor Portfolio
03/23/2021 Sold 2 BABA 4/1/2021 $242.50 Call options @ $3.35 per share against the 200 BABA shares owned.
04/01/2021 2 BABA $242.50 Call options expired out-of-the-money and 200 shares were retained in the Covered Calls Advisor Portfolio.
4/05/2021 Sold 2 BABA 4/16/2021 $235.00 Call options @ $3.00 per share against the 200 BABA shares owned.
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $47,589.34
= ($245.91 - $7.97) * 200 shares + $1.34 commissions
Net Profit Components:
(a) Options Income: +$3,710.65
= ($3.10 + $12.84) * 100 shares +( $4.25 + $3.35 + $3.00) * 200 shares - $3.35 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alibaba shares are unchanged at $225.27 at the April 16th options expiration): -$4,128.00
= ($225.27 - $245.91) * 200 shares; OR
(c) Capital Appreciation (If Alibaba is above $235.00 strike price at the April 16th expiration): -$2,182.00.00
= ($235.00 - $245.91) * 200 shares
1. Total Net Profit (If BABA shares unchanged at $225.27 at options expiration): -$417.35
= (+$3,710.65 options income +$0.00 dividend income -$4,128.00 capital appreciation)
2. Total Net Profit (If BABA shares close above $235.00 at the April 16th options expiration): +$1,528.65
= (+$3,710.65 options income +$0.00 dividend income -$2,182.00 capital appreciation)
1. Absolute Return (If Alibaba shares price unchanged at $225.27): -0.9%
= -$417.35/$47,589.34
Equivalent Annualized Return: -5.1%
= (-$417.35/$47,589.34)*(365/61 days)
2. Absolute Return (If stock closes above $235.00 strike price at options expiration): +3.2%
= +$1,528.65/$47,589.34
Equivalent Annualized Return: +19.2%
= (-$417.35/$47,589.34)*(365/61 days)
