Friday, October 19, 2007

Roll Out -- Merck

With MRK at 53.79 this afternoon, the Covered Calls Advisor Portfolio Oct 50 position was in-the-money. It was decided to keep the MRK stock and roll out to a Nov 52.5 covered call position as follows:

Previously: Initial MRK Post
9/7/07 Bought 500 MRK @ 49.97
9/7/07 Sold 5 MRK Oct07 50 Calls @ 1.85
Today:
10/19/07 BTC 5 MRK Oct 50 @ $3.90
10/19/07 STO 5 MRK Oct 52.5 @ $2.40
Note: MRK stock was trading at $53.79 today when the roll out transaction was executed.

The result for the completed Oct 50 covered call position and the status on the newly established Nov 52.5 covered call position (including commissions) are each summarized below:

(a) Completed Covered Call Position:
Original Stock Investment 9/07/07 – Purchased 500 shares @ $49.97
= $49.97*500 + $9.95 commission = ($24,994.95)
Change in Stock Value ($53.79-$49.97)*500 = $1,910.00
Change in Options Value = Original Income of $911.30 ($1.85*500-$13.70 commission)minus Option Buyback Cost $1,963.70 ($3.90*500+$13.70 commission) = -$1,052.40 ($911.30-$1,963.70)
Overall Net Change ($1,910.00-$1,052.40) = $857.60
ANNUALIZED RETURN ON INVESTMENT:
(857.60/24,994.95)*(365/42 days) = 29.8%

(b) New Covered Call Position Established:
10/19/07 Retained 500 MRK at $53.79 = ($26,895)
10/19/07 Sold 5 NOV07 52.5 Calls @ $2.40 = $1,186.30 ($2.40*500-$13.70 commission)

Annualized Return If Unchanged (ARIU) 26.0%
Annualized Return If Exercised (ARIE) 26.0%
Downside Breakeven Protection 4.5%
Downside Maximum Return Protection 2.4% =[(53.79-52.50)/53.79]*100

2 comments:

  1. Just to be sure I'm following along... The denominator in the Downside Maximum Return Protection should be $53.79, right?

    ReplyDelete
  2. Aviad,
    Yes. That was a typo. I've now corrected it. I appreciate your close reading of the post.
    Regards,
    Jeff

    ReplyDelete