Today, a Covered Calls position was established by buying 500 shares of Alcoa Corporation (ticker symbol AA) stock at $45.55 and simultaneously selling 5 November 19th, 2021 $42.00 Call options at $4.50 per share -- a net debit of $41.05 per share. The Implied Volatility of these Call options was very high at 52.8 when this position was established. This is especially true given that the Q3 2021 earnings have already been reported (on October 14th), so there is no increased Implied Volatility because of an upcoming earnings report. Surprisingly, the $45.55 purchase price was lower than just prior to the earnings report. This was a surprise since the Q3 earnings beat analysts' estimates by a wide margin and the company's future guidance was also raised. Given the Covered Calls Advisor's current Overall Market Meter sentiment of Slightly Bearish, a moderately in-the-money position was established. The Delta of these Call options was 75.0 which approximates the probability that this Covered Calls position will be in-the-money and therefore assigned on the Nov. 19th options expiration date.
According to Reuters Research, the average current target price is $57.75 (+26.8% above today's purchase price) for the thirteen analysts now covering Alcoa. Their estimated 2021 earnings per share has increased since the outstanding Q3 results to a current level of $6.54 per share, a P/E ratio of only 7.0 based on today's purchase price.
As detailed below, a potential outcome for this investment is +2.3% absolute return-on-investment for the next 22 days (equivalent to +38.1% on an annualized return basis) if the stock closes above the $42.00 strike price on the November 19th options expiration date.
Alcoa Corporation (AA) -- New Covered Calls Position
The transactions were as follows:
10/29/2021 Bought 500 shares of Alcoa stock @ $45.55 per share
10/29/2021 Sold 5 Alcoa Nov 19th, 2021 $42.00 Call options @ $4.50 per share
Note: this was a simultaneous Buy/Write transaction
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $20,528.35
= ($45.55 - $4.50) * 500 shares + $3.35 commission
Net Profit Components:
(a) Options Income: +$2,246.65
= ($4.50 * 500 shares) - $3.35 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Alcoa stock is above the $42.00 strike price at Nov 19th expiration): -$1,775.00
= ($42.00 -$45.55) * 500 shares
Potential Total Net Profit (If assigned at expiration): +$471.65
= (+$2,246.65 options income +$0.00 dividend income -$1,775.00 capital appreciation)
Absolute Return: +2.3%
= +$471.65/$20,528.35
Equivalent Annualized Return: +38.1%
= (+$471.65/$20,528.35)*(365/22 days)
The
downside 'breakeven price' at expiration is at $41.05 ($45.55 - $4.50),
which is 9.9% below the current market price of $45.55. This is good protection given the relatively high +38.1% potential annualized ROI for this investment.
