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Wednesday, September 26, 2007

Roll Up Adjustment -- Honeywell

The Covered Calls Advisor Portfolio (CCAP) covered call position in Honeywell(HON) was rolled up today (9/26/07) from the Oct 55s to the Oct 60s. A good-til-cancelled debit limit roll up order was placed at $3.60, and was executed as follows:

Buy-to-Close (BTC) 5 HON Oct 55s @ $4.70
Sell-to-Open (STO) 5 HON Oct 60s @ $1.10
Net Debit on Roll Up $3.60

The ‘net debit to strike price difference ratio’ was 72% [$3.60/($60-$55)], which meets this advisor’s threshold of rolling up only if the ratio is <75%.

A summary of the HON transactions so far is as follows:
Previously: Initial HON post
9/10/07 BTO 500 HON @ $54.23
9/10/07 STO 5 HON Oct 55s @$1.80
Today:
9/26/07 BTC 5 HON Oct 55s @ $4.70
9/26/07 STO 5 HON Oct 60s @ $1.10
Note: HON stock was trading at $59.26 today when the roll up transaction was executed.

The result for the completed Oct 55 covered call position and the status on the newly established Oct 60 covered call position (including commissions) are each summarized below:

(a) Completed Covered Call Position:
Original Stock Investment 9/10/07 – Purchased 500 shares @ $54.23 = ($27,124.95)
Change in Stock Value ($59.26-$54.23)*500 = $2,515.00
Change in Options Value ($913.70-$2,363.70) = -$1,450.00
Net Change ($2,515.00-$1,450.00) = $1,065.00
ANNUALIZED RETURN ON INVESTMENT:
(1,065.00/27,124.95)*(365/14 days) = 102.4%

(b) New Covered Call Position Established:
9/26/07 Retained 500 HON at $59.26 = ($29,630)
9/26/07 Sold 5 OCT07 60 Calls @ $1.10 = $564.95

Annualized Return If Unchanged (ARIU) 28.2%
Annualized Return If Exercised (ARIE) 47.2%
Downside Breakeven Protection 1.9%

2 comments:

  1. I have a similar situation, so I am very interested in the particulars of this.

    BTO you took in around $660
    BTC you spent around $2360
    You're out of pocket now around $1700

    STO you take in around $550
    You're now out of pocket around $1150

    If the call is exercised you'll walk away with around $1550 (2700 - 1150)

    Had you not rolled up, you would have walked away with around $515 ?

    Does that sound about right?


    (Sorry if I quadruple posted this. Technical issues here.)

    ReplyDelete
  2. Hi Ray,
    Your first line should say STO rather than BTO. Everthing else up to the $1550 is correct.

    The $515 is not correct. If the stock remains >$55 (original strike price) at expiration, then my 500 shares are sold (exercised) at $55. Then, my total profit would have been:
    Stock Profit = (55.00-54.23)*500=$385
    Option Profit = $1.80*500=$900
    Total Profit=$385+$900=$1285.
    Note: my original stock purchase price was $54.23 and sold Oct55 option at $1.80.

    Hence, an extra approximately $265 =($1550-$1285) potential with the roll-up versus no roll-up.

    Hope that clarifies it.
    Regards and please keep in touch,
    Jeff

    ReplyDelete