One of the positions I have is: long BIDU and short BIDU 428/17, strike 175 options. BIDU reported earnings last night and the stock price went down a bit. I bought back my 175 calls, and sold the same strike ($175), expiring on 7/21/17, for a credit spread of $5.5/share (credit spread: sale price – purchase price > 0).
For each share of bidu, I sold for $5.5. The margin requirement for each share (i.e., the cash required) is ~$50. The duration of the options contract is 84 days.
ROI (Return On Investment) analysis : (5.5/50) * 100%=11% (i.e., 11% return in 84 days). To convert to one year’s ROI: (11/84) * 365 = 47.8%.
The breakeven point of this trade is 175 (stirke price) – 5.5 (profit from options sale) = $169.5. In other words, even if BIDU drops from 180 to 169.5 (5.8%) 0n 7/21/17, I break even. Or the downside protection is 5.8%.
BIDU chart: BIDU broke out of resisnce around 175. It’s 200 MA (moving average) is 180. So I chose 175 to be on the more conservative side (since this is a joint account with other investors in the group). If it were only my personal account, I might even push for a strike at 180, which will give a higher potential return and also, of couse, lower downside protection.
Note: the above calculation is a brief one without considering the transaction fees and margin interest, all of which become very nominal when the total trading value is relatively high.
I posted my research on RNF, a few weeks ago. I wrote a covered call on 6/2/15, with a strike of $15 and expiry on 6/19/15. Funny, RNF traded right at $15 at the closing on 6/19/15. I was on my way to Philly on 6/19/15. I didn’t expect RNF to go up 6.3% on one day. But lucky me, RNF stopped right at $15, 5 pennies shy of being called away (I like this stock and don’t want it called away). As a result, 17 days gave me 7.8% return (annualized to be 167%). The news was that the analysts expect RNF’s dividend to more than double (from .30s to .60s) for this quarter ending 6/30/15. I intend to sell another call against my holdings with an expiry to go beyond the earnings report date (to play safe).
BABA is the 4th on my new list of 16 stocks . BABA had 2 disappointing earnings, but the market responded positively to the most recent earnings, with several analysts’ upgrade. BAB is now trading above 200 SMA, RSI not overbought at 55, MACD neutral.
From the previous post, ATM ($90 call) covered call gives one 10% downside protection, 65% ROI/Yr; ITM ($87.5 call) has 11.47% downside protection, 56% ROI/Yr; OTM ($92.5 call), 8.77% downside protection and 74% ROI. I’ll select either ATM or OTM calls, in this case.
Here is how I select stocks to invest. Combining the stocks I traded or still hold with the new candidates by screening, I came up with a list of 16 stocks (I usually adjust the screening criteria to provide a manageable list of 15-20).
The stocks that are of high ROI are listed on top of the table with 3 different strikes: ATM, ITM and OTM, for comparison. There are a total of 6 such stocks to consider.
From Row 27 and down are list of stocks still with great but lower ROI.
Column M is the sum of ROI of the covered call + dividend yield.
*Stocks in capital letters with * are new candidates of my screening result with the following criteria: Div yield>5%, Beta>1, Price above 50 and 200 SMA, Sales growth over the past 5 years: >15%, optionable and the RSI is not overbought.
A bit more detailed analysis of 3 stocks of the top 6 will be provided separately.
I have trading SLW for many years and currently still hold a large position of SLW. SLW has been trading in a range between ~18/19 and ~26 for the last 2 years. Currently, it’s trading at the lower end of that range. SLW also pays a dividend, albeit very small, ~1%.
An ATM covered call (Jan. 15, ’16, 19 strike) will produce 80% annualized return. Although SLW is trading below 50 and 200 SMA, the upside for SLW is much higher than the downside.
RNF, closed at $14.94, has been trading above 200 SMA; MACD is neutral, RSI is neutral to slightly high at 59%. Six analysts give a rating of hold and 1 buy with an average price target of $16.88. The price pattern currently is trading at a very tight range, with a coiled spring pattern. It may break above $15 or down to $13.
Dividends: Dividend yield: 9.7%.
A covered call with an ATM strike of $15 will provide 97% annualized ROI.
RNF looks quite impressive and I placed an order to buy RNF and sell RNF Jun 2015 $15 call for a debit of $14.4. One downside is the option volume is on the low side.
There has been an observation, in the Chinese media, that US Dollar Index (USDX) follows a 10-year weak dollar period followed by a 6-year strong dollar period, at least 2 such cycles have been seen (from early 70s – ’86, weak $, followed by ’86 -’92, strong $. And from ’87 – ’97, weak $, followed by ’97 – ’02, strong $. The 3rd cycle: ’02 – ’12, weak $, ’12 – ’18, strong $?). If this observation holds true for the third cycle, there is more fuel left in the current bull market has until 2018, that’s about 3 more years of bull market.
BIDU is reporting earnings on 4/29/15. How to deal with BIDU (and other stocks) earnings report?
I have a BIDU covered call (long BIDU shares and short BIDU options, exp. 5/1/15 strike 215). BIDU is up today and trading at ~222. To protect a downside drop of BIDU, I set up a BIDU calendar spread (I sold BIDU 5/1/15, strike 240 and bought 5/1/15 strike 242.5 for $.25/share). Here are the possible scenarios of BIDU post earnings:
1. BIDU price range, $215-240: My original BIDU covered call is safe and my additional bidi spread will all expire and I’ll keep the spread premium.
2. BIDU price above $240, My original covered call is safe and I’ll buy back BIDU 240 strike and sell a higher premium/higher price option of future expiration.
3. BIDU drops below $215: all options expire. I’ll keep the premiums of all options. I will not sell BIDU shares and will sell more options next week.