Today a Covered Call position was established in Alibaba Group Holdings Ltd. (ticker symbol BABA) when the Covered Calls Advisor's buy/write limit order was executed. One hundred shares were purchased at $232.14 and one May 14th, 2021 Call option was sold at $10.24 at the $225.00 strike price. The time value when this Covered Call was established was $3.10 per share = [$10.24 Call option price - ($232.14 stock price - $225.00 strike price)], so the downside breakeven price is $221.90 ($225.00 strike price - $3.10 time value). Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Call position was established with the Delta at 70.6, which approximates a probability of 70.6% that the Call option will be in-the-money on the options expiration date.
Alibaba is a core holding of the Covered Calls Advisor, so since a prior BABA Covered Call with an expiration last Friday was in-the-money and therefore was closed out by assignment, this new position was established to continue with Alibaba as a part of the the Covered Calls Advisor Portfolio. Alibaba's next earnings report is on May 13th (the day prior to the options expiration date), so before the 13th I will decide whether to close out the position early (my most likely decision) or instead to maintain it through the earnings report.
As detailed below, a potential return-on-investment result for this Alibaba position is +1.4% absolute return (equivalent to +42.4% annualized return over the next 12 days) if the stock is in-the-money and therefore assigned on the May 14th, 2021 options expiration date.
Alibaba Group Holdings Ltd. (BABA) -- New Covered Call Position
The buy/write transaction was as follows:
05/03/2021 Bought 100 shares of Alibaba stock @ $232.14 per share
05/03/2021 Sold 1 Alibaba May 14th, 2021 $225.00 Call option @ $10.24 per share
Note: The Implied Volatility of the Call option was 32.3 when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $22,190.67
= ($232.14 - $10.24) * 100 shares + $.67 commission
Net Profit Components:
(a) Option Income: +$1,023.33
= ($10.24 * 100 shares) - $.67 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA stock is above $225.00 strike price at May 14th, 2021 expiration): -$714.00
= ($225.00 -$232.14) * 100 shares
Total Net Profit: +$309.33
= (+$1,023.33 Call option income +$0.00 dividend income -$714.00 capital appreciation)
Absolute Return-on-Investment: +1.4%
= +$309.33/$22,190.67
Equivalent Annualized Return-on-Investment: +42.4%
= (+$309.33/$22,190.67)*(365/12 days)
