I normally avoid establishing positions in companies with earnings reports prior to the options expiration date, but I allow myself to have no more than one such small, speculative position at any given time. Uber is now that speculative position for me since its quarterly earnings are tomorrow morning and it is a company that has yet to achieve full year profitability. The Implied Volatility of these Call options was very high at 86.7 when this position was established, so there is likely to be substantial price volatility after their earnings report tomorrow. Nevertheless, I am confident that Uber has a bright future as the pre-eminent rideshare company in North America (58% of revenue) and also a substantial worldwide presence in over 70 countries with good ongoing growth prospects under the strong leadership of CEO Dara Khosrowshahi. Uber's primary rideshare competitor in the U.S. is Lyft, but Uber dominates with about three times the ridesharing market share of Lyft, and unlike Lyft it also has a strong food delivery business (and a fledgling freight managment business), so its current market capitalization is ten times greater than Lyft's.
Two reasons I was emboldened to establish this risky Covered Calls position in Uber before its earnings was: (1) three major airlines' recent earnings reports averaged +38.5% higher revenue than for the same quarter last year, and Uber achieves a substantial portion of their ridesharing revenue at airports; and (2) analysts' estimates for Uber's compounded annual revenue growth rate is 16.6% for the next 3 to 5 years. In addition, the current average target price of 44 Wall Street analysts that cover Uber is $45.85 per share (+35.9% above today's purchase price). Finally, I often watch Halftime Report on CNBC where they have asked several panelists to make their top 3 stock picks for 2023. I decided to do the same and one of my three picks was Uber.
As detailed below, a potential outcome for this Uber Technologies investment is +4.6% absolute return-on-investment for the next 11 days (equivalent to +152.0% annualized-return-on-investment) if the stock closes above the $32.50 strike price on the February 17th, 2023 options expiration date.
Uber Technologies Inc. (UBER) -- New Covered Calls Position
The net debit buy/write limit order was executed as follows:
2/7/2023 Bought 500 shares of Uber Technologies Inc. stock @ $33.74 per share
2/7/2023 Sold 5 Uber February 17th, 2023 $32.50 Call options @ $2.67 per share
Note: this was a simultaneous Buy/Write transaction
A possible overall performance result (including commissions) would be as follows:
Covered Calls Net Investment: $15,538.35
= ($33.74 - $2.67) * 500 shares + $3.35 commission
Net Profit Components:
(a) Options Income: +$1,331.65
= ($2.67 * 500 shares) - $3.35 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Uber stock is above the $32.50 strike price at the Feb. 17th expiration): -$620.00
= ($32.50 -$33.74) * 500 shares
Potential Total Net Profit (If assigned at expiration): +$711.65
= (+$1,331.65 options income +$0.00 dividend income -$620.00 capital appreciation)
Absolute Return-on-Investment: +4.6%
= +$711.65/$15,538.35
Equivalent Annualized-Return-on-Investment: +152.0%
= (+$711.65/$15,538.35) * (365/11 days)
The
downside 'breakeven price' at expiration is at $31.07 ($33.74 - $2.67),
which is 7.9% below the current market price of $33.74.
