Established Covered Calls in Cleveland-Cliffs Inc.

This afternoon, a September 30th, 2022 Covered Calls buy/write limit order was executed today in Cleveland-Cliffs Inc. (ticker CLF) at a net debit price of $13.66 per share.  Five hundred shares were purchased at $15.47 and five Sept 30th, 2022 $14.00 strike price Call options were sold at $1.81 per share.  The corresponding extrinsic value (i.e. time value) was $.34 per share [$1.81 Call options premium - ($15.47 stock purchase price - $14.00 strike price)].   The Implied Volatility of the Calls was very high at 66.7 when this position was established, so the options premium received was very attractive.  The probability that the position will be assigned at expiration is approximately 77.2%.  There is no ex-dividend and no earnings report prior to the options expiration date.

This is the third Covered Calls position established at the September 30th quarterly options expiration date and I have yet to establish a position with an options expiration date later than September 30th.  Today's position has 17 days remaining until its Sept. 30th expiration date.  I prefer to establish new Covered Calls with a duration of less than 30 days (note: the average holding period for my positions during the past 12 months has been 22.1 days).  The October 2022 monthly options expiration date is not until October 21st which, as of today, is 38 days away.  The two primary reasons I prefer shorter duration Covered Calls are: (1) they provide higher potential annualized return-on-investment results because of Theta (which is that the rate of time value decay in options premiums increases the closer the option is to its expiration date); and (2) shorter duration positions provide more frequent opportunities to re-evaluate current stock holdings and to modify ongoing strike prices given the volatility of stock prices and our outlook for the individual stocks we own.  

With acquisitions completed of ArcelorMittal USA, AK Steel, and Ferrous Processing and Trading Co., Cleveland-Cliffs is now the largest flat-rolled steel producer in North America and is also now vertically integrated from mining through production.  They supply flat-rolled steel to most major auto manufacturers with plants in North America and the majority of their product is sold under fixed price contracts at good margins to Cleveland-Cliffs--so they have substantially less exposure to the dramatic fluctuations in spot steel prices that is more commonplace among their competitors in the steel industry.  

Cleveland-Cliffs' stock price declined precipitously today in sympathy with today's negative news from Nucor, but I view today's position as an attractive risk given the company's current valuation.  Cleveland-Cliffs' current TTM EV/EBITDA is only 2.4 which is amazingly low in comparison to its 5-year median of 7.2.  This is the lowest EV/EBITDA of the companies that appeared today in the Covered Calls Advisor's stock screener for companies in the Materials Sector.  Furthermore, the average analysts' target price is $22.83 (+47.6% above today's purchase price). 

Some key numbers for this Cleveland-Cliffs Inc. Covered Calls position are:
Covered Calls Net Investment: $6,833.35
Profit if Assigned on Expiration Date: $166.65
Days Until September 30th, 2022 Options Expiration: 17
Absolute Return-on-Investment if Assigned at Expiration: +2.4%
Annualized Return-on-Investment if Assigned at Expiration: +52.4%

Jeff Partlow (The Covered Calls Advisor)
partlow@cox.net