Covered Calls Established in Lam Research Corp.

Today, a Covered Calls position was established by buying 200 shares of Lam Research Corp. (ticker symbol LRCX) stock at $191.62 and selling 2 May 18th, 2018 $190.00 Call options at $9.34 -- a net debit of $182.28 per share.   The Implied Volatility of these May 18th $190.00 Call options was 38.6 when this position was established.  Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a slightly in-the-money position was established.

Lam Research is either 'Buy' or 'Outperform' rated by 18 of the 20 analysts that cover its stock according to Reuters.  The Credit Suisse analyst summarized his detailed analysis this way: "We believe that the Street is missing the growth and cash return potential and is mispricing LRCX.  Its a margin protected way to play big data growth.  The company is benefiting from the 3D NAND transition and is well poised to benefit from the cyclical recovery in memory in 2018.  Company also has about 20% market cap in net cash and could return 50% market cap by 2020."

As detailed below, a potential outcome for this investment is +4.2% absolute return-on-investment for the next 30 days (equivalent to +51.4% on an annualized return basis) if the stock closes above the $190.00 strike price on the May 18th options expiration date.

Lam Research Corp. (LRCX) -- New Covered Calls Position

The transactions were as follows:
04/19/2018 Bought 200 shares of Lam Research stock @ $191.62 per share 
04/19/2018 Sold 2 Lam Research May 18th, 2018 $190.00 Call options @ $9.34 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: $36,462.29
= ($191.62 - $9.34)* 200 shares + $6.29 commission
Net Profit Components:
(a) Option Income: +$1,868.00
= ($9.34 * 200 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If LRCX is above $190.00 strike price at May 18th expiration): -$328.95
= ($190.00 -$191.62)* 200 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$1,539.05
= (+$1,868.00 option income +$0.00 dividend income -$328.95 capital appreciation)

Absolute Return: +4.2%
= +$1,539.05/$36,462.29
Equivalent Annualized Return: +51.4%
= (+$1,539.05/$36,462.29)*(365/30 days)

The downside 'breakeven price' at expiration is at $182.28 ($191.62 - $9.34), which is 4.9% below the current market price of $191.62.  This is good protection given the relatively high +51.4% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the May 18th, 2018 options expiration) for this Lam Research Covered Calls position is 56.1%, so the expected value annualized ROI of this investment (if held until expiration) is +28.8% (+51.4% * 56.1%), a nice expected value profit for this in-the-money Covered Calls position.   

Covered Calls Position Continued in Delta Air Lines Inc.

At the March 16th options expiration, the Covered Calls position in Delta Air Lines Inc. (ticker symbol DAL) expired with the stock price below the $57.50 strike price.  So, the Call options expired and the stock shares were retained in the Covered Calls Advisor's Portfolio.  This afternoon, the Covered Calls Advisor continued this Covered Calls position by selling next month (April 20th, 2018) Call options against the long Delta stock position. 

Some potential return-on-investment results for this position are: 

Delta Air Lines Inc. -- A +0.2% absolute return in 88 days (equivalent to a +0.9% annualized return-on-investment if stock price unchanged at $55.21 at the April 20th expiration; OR a +4.3% absolute return in 88 days (equivalent to a +17.8% annualized return if Delta stock closes above the $57.50 strike price on the April 20th expiration date.

The transactions to-date and two potential return-on-investment results are detailed below.


1. Delta Air Lines Inc. (DAL) -- Covered Calls Position Continued

The detailed transactions and calculations are as follows:
01/23/2018  Bought 400 Delta Air Lines Inc. shares @ $59.63
01/23/2018 Sold 4 DAL Mar 16, 2018 $57.50 Call options @ $3.48
The Call options Open Interest was 7,772 contracts when this position was established and their Implied Volatility was 25.5
Note: this was a simultaneous buy/write transaction.
02/21/2018 $.305 ex-dividend per share
03/16/2018 4 DAL Mar 16th $57.50 Call options expired
03/29/2018 Sold 4 DAL Apr 20, 2018 $57.50 Call options @ $.77 per share
Note: the price of DAL was $55.21 when these Call options were sold

Two possible overall performance results (including commissions) would be as follows:
Cost Basis Purchase of 400 shares DAL: $22,467.63
= ($59.63 -$3.48)*400 shares + $7.63 commissions

Net Profit Components:
(a) Options Income: +$1,700.00
= ($3.48 + $.77) *400 shares
(b) Dividend Income: $122.00
= $.305 per share x 400 shares
(c) Capital Appreciation (If DAL stock price is unchanged at current $55.21 at Apr 20th expiration): -$1,772.95
= ($55.21 -$59.63)* 400 shares - $4.95 commission; OR
(c) Capital Appreciation (If DAL stock closes above $57.50 strike price at expiration) : -$856.95
= ($57.50 -$59.63)* 400 shares - $4.95 commission

Two Net Profit Possibilities:
(a) If Delta stock price is unchanged at current $55.21 at Apr 20th expiration: $49.05
= (+$1,700.00 options income +$122.00 dividends -$1,772.95 capital appreciation); OR
(b) If Delta shares assigned on Apr 20th options expiration date: +$965.05
= (+$1,700.00 options income +$122.00 dividends -$856.95 capital appreciation)

Two Potential Return-on-Investment Results:
(a) If DAL stock price is unchanged at current $55.21 at Apr 20th expiration:
Absolute Return : +0.2%
= +$49.05/$22,467.63
Equivalent Annualized Return: +0.9%
= (+$49.05/$22,467.63)*(365/88 days); OR
(b) If DAL stock price is above $57.50 strike price at Apr 20th expiration:
Absolute Return : +4.3%
= +$965.05/$22,467.63
Equivalent Annualized Return: +17.8%
= (+$965.05/$22,467.63)*(365/88 days)

Established Covered Calls Position in iShares China Large-Cap ETF

Today, a Covered Calls position was established in iShares China Large-Cap ETF (ticker symbol FXI) with an April 20th, 2018 expiration at the $46.00 strike price. This ETF was purchased at $46.86 and the Call options sold at $1.79 per share.  The Implied Volatility of these Call options was 28.6 when this position was established.

As detailed below, a potential outcome is +2.1% absolute return in 23 days (equivalent to a +32.6% annualized return-on-investment) if the price of iShares China Large-Cap ETF shares remain above the $46.00 strike price at expiration.


1. iShares China Large-Cap ETF (PHM) -- New Covered Calls Position

The transactions were as follows:
03/29/2018 Bought 600 FXI shares @ $46.86
03/29/2018 Sold 6 FXI Apr 20, 2018 $46.00 Call options @ $1.79
Note: a simultaneous buy/write transaction was executed.

A possible overall performance result (including commissions) for this iShares China Covered Calls position is as follows:
Stock Purchase Cost: $26,942.97
= ($46.86 - $1.79) *600 shares +$8.97 commission

Net Profit Components:
(a) Options Income: +$1,074.00
= ($1.79*600 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If FXI assigned at Apr 20, 2018 options expiration): -$520.95
=+($46.00-$46.86)*600 - $4.95 commissions

Total Net Profit (If FXI assigned at $46.00 at April 20th expiration): +$553.05

= (+$1,074.00 +$0.00 -$520.95)

Absolute Return (If FXI assigned at $46.00 on April 20th options expiration date): +2.1%

= +$553.05/$26,942.97

Annualized Return: +32.6%

= (+$553.05/$26,942.97)*(365/23 days)

The downside 'breakeven price' at expiration is at $45.07 ($46.86 - $1.79), which is 3.8% below the current market price of $46.86.  This is substantial downside protection given the potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the April 20th, 2018 options expiration) for this iShares China Large-Cap ETF Covered Calls position is 61.3%, so the expected value annualized ROI of this investment (if held until expiration) is +20.0% (+32.6% * 61.3%), an attractive expected value result for this moderately in-the-money Covered Calls position. 

Established Covered Calls Position in Discover Financial Services

Today, a Covered Calls position was established in Discover Financial Services (ticker DFS) for the April 20th, 2018 expiration and at the $72.50 strike price when the stock price was $74.96.  Discover's stock has declined about $5 per share since its earnings report two months ago. 

One of the Screeners developed by the Covered Calls Advisor called the 'QVG Model' ('QVG' stands for Quality, Value, and Growth) and uses a combination of factors in these three categories.  Discover Financial is one of the stocks that was identified by this screen.  Of the 25 analysts surveyed by Reuters, 19 rate Discover as either a Buy or Outperform.  Another upcoming benefit to Discover is that the 2017 tax rate for Discover was 40.7% which will decline substantially this year as a result of the new corporate tax rate law. 

As detailed below, a potential return-on-investment result is +1.87% absolute return (equivalent to +22.0% annualized return for the next 31 days) if the stock is assigned on the April 20th, 2018 options expiration date.

Discover Financial Services (DFS) -- New Covered Calls Position
The Implied Volatility of the Call options was 25.6 when these Apr 20th $72.50 Call options were sold.  The options liquidity is also good with 710 open interest contracts.

As shown in the chart below, a Covered Calls positions was chosen instead of its synthetically equivalent short 100% Cash-Secured Put options position in this instance since the annualized ROI potential is higher for the Covered Calls:

You will notice in the chart above (click on chart to view a larger and more legible version) that there is a column titled "Intervening Earnings" and "NO*" with an indication that "If 'YES' then consider avoiding position".  Discover's next quarterly earnings report is after the April 20, 2018 options expiration date.
Also in the chart above is a column called "Intervening Ex-Div" and "NO" with an indication that "If 'YES' then complete Dividend Capture Strategy spreadsheet".  Discover's next ex-dividend date is after the April 20th expiration date.

For this position, the downside 'breakeven price' at expiration is at $71.16 ($74.96 - $3.80), which is 5.1% below the current market price of $74.96. 

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the April 20th, 2018 options expiration) for this Discover Covered Calls position is 67.2%, so the expected value annualized ROI of this investment (if held until expiration) is +14.8% (+22.0% * 67.2%), a satisfactory result for this moderately in-the-money Covered Calls position, especially given that there is no earnings report prior to the options expiration date.

The 'crossover price' at expiration is $76.30 = $74.96 + [$3.80 + ($74.96 - $72.50)].  This is the price above which it would have been more profitable to simply buy-and-hold Discover Financial Services stock until April 20th (the April 2018 monthly options expiration date) rather than establishing this Covered Calls position.

If you have any questions or comments to share about this position, please click on the Comments link below.