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Tuesday, February 20, 2018

Covered Calls Positions Continued in Caterpillar Inc. and Intel Corporation

Last Friday, the February 16th, 2018 Covered Calls positions in Caterpillar Inc. (ticker symbol CAT) and Intel Corp. (ticker INTC) expired with the stock prices below their strike prices.  So, the Call options expired and their stock shares were retained in the Covered Calls Advisor's Portfolio.  This morning, the Covered Calls Advisor continued both Covered Calls positions by selling next month (March 16th, 2018) Call options against both long stock positions. 

Some potential overall return-on-investment results for each position are: 
  • Caterpillar Inc. -- A +4.4% absolute return in 47 days (equivalent to a +34.4%  annualized return if Caterpillar stock closes above the $155.00 strike price on the March 16th, 2018 expiration date.
  • Intel Corp. -- A +1.0% absolute return in 46 days (equivalent to a +7.6% annualized return if Intel stock is above the $46.00 strike price on the March 16th expiration date.
The transactions to-date and potential return-on-investment results for both positions are detailed below. 

1. Caterpillar Inc. (CAT) -- Covered Call Position Continued
The transactions are as follows:
01/29/2018 Bought 100 shares of Caterpillar stock @ $160.12 per share 
01/29/2018 Sold 1 Caterpillar February 16th, 2018 $157.50 Call option @ $5.99 per share
Note: this was a simultaneous Buy/Write transaction
02/16/2018 1 CAT March 16th Call option expired and 100 shares of CAT stock were retained in the Covered Calls Advisor Portfolio
Note: the price of CAT stock was $156.29 upon the options expiration.
02/20/2018 Continuation of CAT Covered Call position by selling 1 Mar 16th, 2018 Call option at the $155.00 strike @ $6.00 per share
Note: CAT stock was at $157.68 when this transaction occurred


A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $15,418.62
= ($160.12 - $5.99)* 100 shares + $5.62 commission

Net Profit Components:
(a) Options Income: +$1,199.00
= ($5.99 + $6.00) * 100 shares
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (If CAT stock is above $155.00 strike price at Mar16th expiration): -$516.95
= ($155.00 -$160.12)* 100 shares - $4.95 commission

Total Net Profit: +$682.05
= (+$1,199.00 options income +$0.00 dividend income -$516.95 capital appreciation)

Absolute Return: +4.4%
= +$682.05/$15,418.62
Equivalent Annualized Return: +34.4%
= (+$682.05/$15,418.62)*(365/47 days)


2. Intel Corporation (INTC) -- Covered Calls Position Continued
An ex-dividend occurred on February 6th for $.30 per share. 

The transactions have been as follows:
01/30/2018 Bought 400 Intel shares @ $49.23
01/30/2018 Sold 4 Intel 02/16/2018 $47.50 Call options @ $2.04
Note: a simultaneous buy/write transaction was executed.
02/06/2018 Upcoming quarterly ex-dividend of $.30 per share
02/16/2018 4 Intel Feb. 16th Call options expired and 400 shares of Intel stock were retained in the Covered Calls Advisor Portfolio
Note: the price of Intel stock was $45.56 upon the options expiration.
02/20/2018 Continuation of Intel Covered Calls position by selling 4 Mar 16th, 2018 Call options at the $46.00 strike price @ $1.38 per share
Note: Intel stock was at $46.14 when this transaction occurred

A possible overall performance result (including commissions) for this Intel Covered Calls position is as follows:
Covered Calls Cost Basis: $18,880.95
= ($49.23 - $2.04) *400 + $4.95 commission

Net Profit Components:
(a) Options Income: +$1,357.69
= ($2.04 + $1.38) *400 shares - $10.31 commissions

(b) Dividend Income: +$120.00
= ($.30 dividend per share x 400 shares)
(c) Capital Appreciation (If INTC assigned at $46.00 strike price at Mar2018 options expiration): -$1,296.95
+($46.00 -$49.23)*400 shares - $4.95 commissions

Total Net Profit (If Intel assigned at $46.00 at March 16th, 2018 expiration): +$180.74
= (+$1,357.69 +$120.00 -$1,296.95)

Absolute Return (If Intel assigned at $46.00 at Mar 16th, 2018 expiration): +1.0%
= +$180.74/$18,880.95
Annualized Return: +25.4%
= (+$180.74/$18,880.95)*(365/46 days)

Saturday, February 17, 2018

February 16th, 2018 Options Expiration Results

The Covered Calls Advisor Portfolio had five positions with February 16th, 2018 options expirations.  Of these, three positions (Alibaba Group Holding Ltd., Micron Technology Inc., and Valero Energy Corp.) closed in-the-money, so the maximum possible return-on-investment result was achieved for each of these positions:
  • Alibaba Group Holding Ltd.:  +2.2% absolute return (+25.6% annualized return) in 31 days
  • Micron Technology Inc.:  +3.15% absolute return (+31.1% annualized return) in 37 days  
  • Valero Energy Corp.:  +2.4% absolute return (+54.7% annualized return) in 16 days
The cash now available in the Covered Calls Advisor Portfolio from the closing of these three 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.  

The remaining two positions (Caterpillar Inc. and Intel Corporation) closed yesterday with their stock price below their strike prices, so those shares will remain in the Covered Calls Advisor Portfolio (see holdings in right sidebar) until either the stock is sold or continuation Covered Calls positions are established.  Caterpillar's strike price was $157.50 and the stock closed at yesterday's expiration at $156.29 while Intel had a $47.50 strike price and it closed at $45.56.

To show one example of how the return-on-investment results for closed Covered Calls positions are calculated, the details for one of the three assigned positions (Alibaba) is provided here:


Alibaba Group Holding Ltd. (BABA) -- Covered Calls Position Closed
The transactions were as follows:
01/17/2017 Bought 300 shares of Alibaba stock @ $180.09 per share 
01/17/2017 Sold 3 Alibaba February 16th, 2017 $170.00 Call options @ $13.73 per share
Note: this was a simultaneous Buy/Write transaction
02/16/2018 3 BABA Feb 16th, 2018 $170.00 Call options expired in-the-money, so 300 shares of BABA owned were sold at the $170.00 strike price, thus closing out this Covered Calls position.

The overall performance result (including commissions) was as follows:
Covered Calls Cost Basis: $49,914.96
= ($180.09 - $13.73)* 300 shares + $6.96 commission

Net Profit Components:
(a) Options Income: +$4,119.00
= ($13.73* 300 shares)
(b) Dividend Income: +$0.00 
(c) Capital Appreciation (BABA stock closed above $170.00 strike price on Feb 16th expiration): -$3,031.95
= ($170.00 -$180.09)* 300 shares - $4.95 commission

Total Net Profit: +$1,087.05
= (+$4,119.00 options income +$0.00 dividend income -$3,031.95 capital appreciation)

Absolute Return: +2.2%
= +$1,087.05/$49,914.96
Equivalent Annualized Return: +25.6%
= (+$1,087.05/$49,914.96)*(365/31 days)

Tuesday, February 13, 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 $169.41 and selling 2 March 16th, 2018 $160.00 Call options at $13.86 -- a net debit of $155.55 per share.   Given the Covered Calls Advisor's current Overall Market Meter sentiment of Neutral, a relatively conservative in-the-money position was established.

The Implied Volatility of the March 16th $160.00 Call options was 44.5 when this position was established.  With the sharp decline in LRCX over the past few weeks, the Implied Volatility has spiked up dramatically to its highest level in more than 2 years.  Selling this Covered Call at this time seems very advantageous, especially since there is no quarterly earnings report prior to expiration.  In addition there is an upcoming ex-dividend of $.50 on March 6th which is included in the detailed analysis below.

Lam Research appeared on the Covered Calls Advisor's QVG (Quality, Value, and Growth) screener.  In addition, LRCX's trailing twelve months tax rate was 34.2%, so it will benefit substantially as a result of the significantly lower corporate tax rate in the recently passed tax bill.  Furthermore, Lam Research is either 'Buy' or 'Outperform' rated by 16 of the 17 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 +3.05% absolute return-on-investment for the next 32 days (equivalent to +34.7% on an annualized return basis) if the stock closes above the $160.00 strike price on the March 16th options expiration date.

Lam Research Corp. (LRCX) -- New Covered Calls Position
The transactions were as follows:
02/13/2018 Bought 200 shares of Lam Research stock @ $169.41 per share 
02/13/2018 Sold 2 Lam Research Mar 16th, 2017 $160.00 Call options @ $13.68 per share
Note: this was a simultaneous Buy/Write transaction
03/06/2018 Upcoming ex-dividend of $.50 per share

A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $31,152.29
= ($169.41 - $13.68)* 200 shares + $6.29 commission
Net Profit Components:
(a) Option Income: +$2,736.00
= ($13.68 * 200 shares)
(b) Dividend Income: +$100.00
= $.50 per share * 200 shares 
(c) Capital Appreciation (If LRCX is above $160.00 strike price at Mar 16th expiration): -$1,886.95
= ($160.00 -$169.41)* 200 shares - $4.95 commission

Potential Total Net Profit (If assigned at expiration): +$949.05
= (+$2,736.00 option income +$100.00 dividend income -$1,886.95 capital appreciation)

Absolute Return: +3.05%
= +$949.05/$31,152.29
Equivalent Annualized Return: +34.7%
= (+$949.05/$31,152.29)*(365/32 days)

The downside 'breakeven price' at expiration is at $155.23 ($169.41 - $13.68 - $.50), which is 8.4% below the current market price of $169.41.  This is substantial protection given the relatively high +34.7% potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the March 16th, 2017 options expiration) for this Lam Research Covered Calls position is 69.6%, so the expected value annualized ROI of this investment (if held until expiration) is +24.2% (+34.7% * 69.6%), a nice expected value profit for this moderately in-the-money Covered Calls position.