A Covered Calls position was established in Applied Materials Inc. (ticker AMAT) with a June 18th, 2021 options expiration date. A buy/write transaction entered at a net debit of $102.20 was executed by purchasing 200 shares of AMAT at $116.36 and simultaneously selling two June 18th, 2021 Call options at the $105.00 strike price at $14.16 per share. The time value when this Covered Calls position was established was $2.80 per share = [$14.16 Call options price - ($116.36 stock price - $105.00 strike price)]. Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established. The Delta was 76.1 which approximates a probability of 76.1% that the Call options will be in-the-money and therefore the stock assigned (i.e. sold) on the options expiration date.
The Implied Volatility of these Calls was very high at 49.4 today when this transaction was executed. I attribute this abnormally high Implied Volatility to the uncertainty associated with the upcoming Q2 earnings report on May 20th, but the range of earnings per share estimates is narrow at between $1.50 and $1.56, so I think the risk/reward profile here is a net positive. Also, Applied Materials goes ex-dividend at $.24 per share (only 0.8% annualized dividend yield at the current stock price) on May 26th which is prior to the June 18th options expiration date, so this dividend is included in the potential return-on-investment results shown below.
Applied Materials continues to screen attractively on the Covered Calls Advisor's 'Large Cap Value/Profitability/Growth' screen as a leader in the Technology (Semiconductor Equipment) industry. Analysts remain bullish as twenty-three of twenty-eight analysts rating it as
either a 'Buy' or 'Outperform'. The other five analysts rate it as 'Neutral' and none rate it as 'Underperform' or 'Sell'. The average target price of these analysts is $155.45 (33.6% above today's purchase price).
As shown below, two potential return-on-investment results for this Applied Materials Covered Calls position are:
(1) +2.7% absolute return in 14 days (equivalent to a +71.3% annualized return-on-investment in the relatively unlikely event that AMAT stock is assigned at $105.00 on the day prior to the May 26th ex-dividend date; OR
(2) +3.0% absolute
return in 38 days (equivalent to a +28.5% annualized
return-on-investment if assigned at the June 18th expiration.
The $102.20 net debit buy/write limit order was transacted as follows:
05/12/2021 Bought 200 AMAT shares @ $116.36
05/12/2021 Sold 2 AMAT June 18th, 2021 $105.00 Call options @ $14.16
Note: the Open Interest in the Calls was 847 contracts.
05/26/2021 200 AMAT shares go ex-dividend @ $.24 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $20,441.34
= ($116.36 - $14.16) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$2,830.66
= ($14.16 * 200 shares) - $1.34 commission
(b) Dividend Income (If Applied Materials stock assigned on day prior to May 26th ex-dividend date): +$0.00; OR
(b) Dividend Income (If AMAT stock assigned on June 18th, 2021 options expiration date): $48.00
= $.24 dividend per share x 200 shares
(c) Capital Appreciation (If stock is assigned at $105.00 on the day prior to the May 26th ex-dividend date): -$2,272.00
= ($105.00 -$116.36) * 200 shares; OR
(c) Capital Appreciation (If AMAT stock is above $105.00 strike price at the June 18th expiration): -$2,272.00
= ($105.00 -$116.36) * 200 shares
1. Total Net Profit (If AMAT stock assigned on day prior to May 26th ex-dividend date): +$558.66
= (+$2,830.66 options income +$0.00 dividend income -$2,272.00 capital appreciation): OR
2. Total Net Profit (If stock assigned on June 18th options expiration date): +$606.66
= (+$2,830.66 options income +$48.00 dividend income -$2,272.00 capital appreciation)
1. Absolute Return (If AMAT stock assigned on day prior to May 26th ex-dividend date): +2.7%
= +$558.66/$20,441.34
Equivalent Annualized Return: +71.3%
= (+$558.66/$20,441.34) * (365/14 days); OR
2. Absolute Return (If stock assigned on June 18th, 2021 options expiration date): +3.0%
= +$606.66/$20,441.34
Equivalent Annualized Return: +28.5%
= (+$606.66/$20,441.34)*(365/38 days)
Either
outcome would provide a good return-on-investment result. These returns will be achieved as long as the stock is
above the $105.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $101.96 ($116.36 -$14.16 -$.24)
provides 12.4% downside protection below today's purchase
price.
Using the Cox-Ross-Rubinstein Options Pricing Model, the probability of
making a profit (if held until the June 18th, 2021 options expiration) for
this Applied Materials Covered Calls position is 76.1%, so the approximate expected value annualized
ROI of this investment (if held until expiration) is +21.7% (+28.5% * 76.1%) for this in-the-money AMAT Covered Calls position.
