A short-term Covered Calls position was established this afternoon in Applied Materials Inc. (ticker AMAT) with a March 3rd, 2023 options expiration date. A buy/write transaction entered at a net debit of $107.72 was executed by purchasing 200 shares of AMAT at $113.86 and simultaneously selling two March 3rd, 2023 Call options at the $109.00 strike price at $6.14 per share. The potential time value profit when this Covered Calls position was established was $1.28 per share = [$6.14 Call options price - ($113.86 stock price - $109.00 strike price)]. Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established. The Delta was 74.2 which approximates a probability of 74.2% 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 33.8 when this transaction was executed.
The Q4 2022 earnings were reported after market close yesterday. The revenue was better than for the same quarter last year by 10% and $2.03 per share earnings were 17.5% above the average analysts' estimates. The current P/E ratio is 14.8 and the average analysts' target price of $124.36 is +9.2% above today's purchase price. Four investment companies that have modified their target price for AMAT since last evening's earnings report all increased their target prices.
In addition to the $1.28 potential time value profit described above, there is an upcoming ex-dividend next week on February 22nd of $.26 per share (0.9% annual dividend yield) which is included in the potential return-on-investment results detailed below.
Two potential return-on-investment results are:
- +1.2% absolute return (equivalent to +86.3% annualized return for the next 5 days) if the stock is assigned early (on the last business day prior to the February 22nd, 2023 ex-dividend date); OR
- +1.4% absolute return (equivalent to +34.7% annualized return over the next 15 days) if the stock is assigned on the March 3rd, 2023 options expiration date.
Applied Materials Inc. -- New Covered Calls Position Established
The net debit buy/write limit order was transacted as follows:
2/17/2023 Bought 200 AMAT shares @ $113.86
2/17/2023 Sold 2 AMAT March 3rd, 2023 $109.00 Call options @ $6.14 per share.
Note: as is often the case, these Call options were transacted slightly below the midpoint of the $6.10/$6.20 bid/ask spread.
2/22/2023 Upcoming AMAT ex-dividend of $.26 per share.
Two possible overall performance results (including commissions) for this Covered Calls position are as follows:
Covered Calls Net Investment: $21,545.34
= ($113.86 - $6.14) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,226.66
= ($6.14 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on Feb. 21st, the last business day prior to the February 22nd ex-div date): +$0.00; or
(b) Dividend Income (If AMAT stock assigned at the March 3rd, 2023 expiration): $52.00
= ($.26 dividend per share x 200 shares)
(c) Capital Appreciation (If Applied Materials Call options assigned early on Feb. 21st): -$972.00
+($109.00 strike price - $113.86 stock price) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $109.00 strike price at the March 3rd options expiration): -$972.00
+($109.00 - $113.86) * 200 shares
Either
outcome provides a good return-on-investment result for this Applied Materials investment. These returns will be achieved as long as the stock is
above the $109.00 strike price at assignment. If the stock declines
below the strike price, the breakeven price of $107.46 ($113.86 -$6.14 -$.26)
provides a 5.6% downside protection below today's purchase
price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this Applied Materials position, all nine criteria were met.
