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Monday, April 23, 2018

Covered Calls Established in Citigroup Inc.

Today, a new Covered Calls position was established in Citigroup Inc. (ticker C).   It was established for the May 18th, 2018 options expiration date and given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, an in-the-money position at the $67.50 strike price was entered when the stock was at $69.73 per share.

As shown below, a potential result is +1.6% absolute return in 26 days (equivalent to a +22.9% annualized return-on-investment). 


Citigroup Inc.(C) -- New Covered Calls Position
The implied volatility of the Call options was 24.9 when this position was established.  There is no intervening earnings report prior to expiration.  An expected $.32 dividend with an ex-dividend date prior to the May 18th options expiration date is expected and is included in the potential results detailed below.

The transactions were as follows:
04/23/2018 Bought 500 shares of Citigroup stock @ $69.73 per share 
04/23/2018 Sold 5 Citigroup May 18th, 2018 $67.50 Call options @ $3.01 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: $33,368.30
= ($69.73 - $3.01)* 500 shares + $8.30 commission

Net Profit Components:
(a) Options Income: +$1,505.00
= ($3.01* 500 shares)
(b) Dividend Income: +$160.00 = $.32 per share * 500 shares 
(c) Capital Appreciation (If Citi is above $67.50 strike price at May 18th expiration): -$1,119.95
= ($67.50 -$69.73)* 500 shares - $4.95 commission

Total Net Profit: +$545.05
= (+$1,505.00 options income +$160.00 dividend income -$1,119.95 capital appreciation)

Absolute Return: +1.6%
= +$545.05/$33,368.30
Equivalent Annualized Return: +22.9%
= (+$545.05/$33,368.30)*(365/26 days)

The downside 'breakeven price' at expiration is at $66.40 ($69.73 - $3.01 -$.32), which is 4.8% below the current market price of $69.73.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the May 18th, 2018 options expiration) for this Citigroup Covered Calls position is 69.8%, so the expected value annualized ROI of this investment (if held until expiration) is +16.0% (+22.9% * 69.8%).   

Saturday, April 21, 2018

April 20, 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had seven positions with April 20th 2018 options expirations:
  • Four positions (Discover Financial Services, iShares China Large-Cap ETF, JPMorgan Chase, and PulteGroup Inc.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions.
  • Three positions (Alibaba Group Holding Ltd, Delta Air Lines Inc., and U.S. Steel Corp.) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see current holdings in right sidebar) until either the stock is sold or continuation Covered Calls positions are established.
So far in 2018, twenty-four of twenty-nine positions (82.8%) were assigned profitably and at an average annualized return-on-investment of +26.8%.  This 82.8% year-to-date result exceeds the Covered Calls Advisor's overall long-term goal of having at least 67% of positions closed out at a profit.  None of the remaining five positions (Alibaba, Blackstone Group, Delta Air Lines, Sinclair Broadcasting, and U.S. Steel) have yet to be closed out, but instead currently remain open as long stock positions.  Most likely, May 18th, 2018 Call options will be sold against each of these five positions in the next few days. 

For the four positions assigned at yesterday's April 20th expiration, the average annualized return-on-investment was +23.5%.  The results for each position was:
  • Discover Financial Services:  +1.9% absolute return (+22.0% annualized return) in 31 days
  • iShares China Large-Cap ETF:  +2.1% absolute return (+32.6% annualized return) in 23 days 
  • JPMorgan Chase:  +2.5% absolute return (+20.1% annualized return) in 45 days
  • PulteGroup Inc.:  +1.8% absolute return (+19.4% annualized return) in 33 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these four positions will be retained until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  Any new position(s) established with this available cash will be posted on this site on the same day the transactions occur.  

To demonstrate how return-on-investment results for a closed Covered Calls position are calculated, the details for one of the four assigned positions is detailed below:

iShares China Large-Cap ETF (FXI) -- Covered Calls Position Closed
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.
04/20/2018 FXI Calls expired in-the-money, so 600 shares of FXI were sold at $46.00 strike price
Note: the price of FXI shares was $46.42 at expiration

The overall performance result (including commissions) for this iShares China ETF Covered Calls position was 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 (FXI assigned at Apr 20, 2018 options expiration): -$520.95
=+($46.00-$46.86)*600 - $4.95 commissions

Total Net Profit: +$553.05
= (+$1,074.00 +$0.00 -$520.95)

Absolute Return: +2.1%
= +$553.05/$26,942.97
Annualized Return: +32.6%
= (+$553.05/$26,942.97)*(365/23 days)

Thursday, April 19, 2018

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.