With acquisitions completed of ArcelorMittal USA and AK Steel, Cleveland-Cliffs is now the largest flat-rolled steel producer in North America and is also now vertically integrated from mining through production. They also recently announced the acquisition of Ferrous Processing and Trading Co. which further enhances their vertical integration by establishing a significant foothold in the prime scrap metal market. Earnings this fiscal year are expected to approach $6.00 per share which implies a very attractive valuation with a P/E Ratio below 4.0. Furthermore, the average analysts' target price is $28.31 (+34.6% above today's purchase price).
The Implied Volatility of the Call options was very high at 58.8 when this Covered Calls position was established. As shown below, this results in a very attractive maximum potential annualized return-on-investment of +57.1%. A primary reason for this unusually high Implied Volatility of the CLF Calls is because of the elevated uncertainty associated with release of their Q3 earnings before market open this Friday. But given the positive earnings and revenue beats by a somewhat comparable company in the same industry, Steel Dynamics, which reported their Q3 earnings yesterday afternoon and given the positive market reaction to this news during today's trading, the Covered Calls Advisor's confidence increased that Cleveland-Cliffs should also have a good earnings report. Another major steel producer (Nucor) reports earnings this Thursday and I considered establishing a Covered Calls position in it instead of in CLF, however the Implied Volatility in the Nucor Calls was 38.6 so the potential annualized roi was substantially less than what might be achieved with this Cleveland-Cliffs position.
As detailed below for this Cleveland-Cliffs Inc. Covered Calls position, the maximum potential return-on-investment result is +5.0% absolute
return in 32 days (equivalent to a +57.1% annualized
return-on-investment) if the stock price is above the $20.00 strike price on the November 19th, 2021 options expiration date.
Cleveland-Cliffs Inc. (CLF) -- New Covered Calls Position Established
The Buy/Write limit order was executed as follows:
10/19/2021 Bought 1,000 shares of Cleveland-Cliffs Inc. stock @ $21.04 per share
10/19/2021 Sold 10 CLF Nov. 19th, 2021 $20.00 Call options @ $2.00 per share
A possible overall performance result (including commissions) for this Cleveland-Cliffs Covered Calls position is as follows:
Stock Purchase Cost: $19,046.70
= ($21.04 - $2.00) * 1,000 shares + $6.70 commission
Net Profit:
(a) Options Income: +$1,993.30
= ($2.00 * 1,000 shares) - $6.70 commission
(b) Dividend Income: +$0.00
+($20.00 -$21.04) * 1,000 shares
Total Net Profit (If 1,000 Cleveland-Cliffs shares assigned at $20.00 strike price at expiration): +$953.30
