FDX, ASML, WFC Analysis

Update 1/20/2016: In light of the increasingly bearish cast to the market, I've exited the long leg of my ASML diagonal with the intent of rolling the position forward later. If I determine that rolling is no longer a viable option, then I'll end the series and calculate results. The series overll is in a losing position at this point.

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Update 1/4/2016: I've exited the short leg of ASML, made up of JAN-series calls, with 62% of potential profit. I shall wait a bit before buying in with a new short leg.

ASML	diagonal, short leg
option	credit	debit	profit	yield	entry	exit	days
-c95nov	2.20	-1.05	1.15	109.5%	10/23/2015	11/10/2015	18
-c95dec	2.56	-1.20	1.36	113.3%	11/10/2015	11/23/2015	13
-c92jan	3.09	-1.45	1.64	113.1%	11/23/2015	12/11/2015	18
<c90jan	2.39	-0.82	1.57	191.5%	12/15/2015	1/4/2016	20
-----------	-----------	-----------	-----------	-----------	-----------	-----------	-----------
Status:	10.24	-4.52	5.72	126.5%			69
option description key: long/short, call/put, strike, series

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Three symbols -- FDX, ASML and WFC -- gave bull signals on Thursday. Their low implied volatility levels relative to their annual ranges and their low historical odds that a bull signal will persist in a continued rise make them candidates for the covered call strategy or a variant.

The classic covered call consists of long shares of stock covering short sales of call options -- a very expensive proposition, since stock isn't leveraged. I shall be building trades using a variant that substitutes LEAPS -- options a year or more away from expiration -- in place of the shares.

Of the three, FDX is the most attractive on the face of it because it has the highest price. It's a affordable using LEAPS for the long leg; if I were using shares, it would require a larger commitment in funds that I'm willing to make.

However, FDX on second look has a higher relative implied volatility than I like.

WFC has the lowest price, but but also the lowest implied volatility.

However, it has a high dividend yield, 2.8%, making assignment a risk four times a year unless I set out those months.

ASML is in the Baby Bear position: Price and volatility -- the porridge -- are neither too hot nor too cold, but just right, so ASML is where I shall put my focus.

ASML Holding NV (ASML), headquartered in Veldhoven, Netherlands, develops semiconductor equipment systems, most noticeably photolithography equipment, a key component of production.

[ASML in Wikipedia]

ASML

I shall use the NOV series of options, which trade for the last time 28 days hence on Nov. 20 for the short leg, and the JAN2018 series for the long leg.

STATS

Implied volatility stands at 28%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. ASML’s volatility stands in the 24th percentile of its annual range.

The Trade

A LEAPS-variant covered call places the short leg one strike out of the money and the long leg one strike in the money.

The short leg first,
Short the $95 calls
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
	95	59.4%

The credit premium is $2.20. The stock at the time of entry was priced at $93.62.

And the long leg,

Long the $92.5 calls
bought for a debit and expiring Jan. 20, 2017
Probability of expiring in-of-the-money

JAN 2017	Strike	ITM
	92.5	43.4%

The debit premium is $13.34.

The stock at the time of entry was priced at $93.65.

Decision for My Account

I've opened a LEAPS-variant covered call on ASML as described above.

-- Tim Bovee, Portland, Oregon, Oct. 23, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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