Tuesday, October 2, 2007

Roll Up Adjustment -- Fluor

The Covered Calls Advisor Portfolio (CCAP) covered call position in Fluor (FLR) was rolled up today (10/02/07) from the Oct 140 to the Oct 150. A good-til-cancelled debit limit roll up order was placed at $7.10, and was executed as follows:

Buy-to-Close (BTC) FLR Oct 140 @ $11.60
Sell-to-Open (STO) FLR Oct 150 @ $4.50
Net Debit on Roll Up $7.10

The ‘net debit to strike price difference ratio’ was 71% [$7.10/($150-$140)], which meets this advisor’s threshold of rolling up only if the ratio is <75%.

A summary of the FLR transactions so far is as follows:
Previously: Initial FLR post
9/18/07 BTO 100 FLR @ $138.17
9/18/07 STO 1 FLR Oct 140 @$4.90
Today:
10/2/07 BTC 1 FLR Oct 140 @ $11.60
10/2/07 STO 1 FLR Oct 150 @ $4.50
Note: FLR stock was trading at $150.16 today when the roll up transaction was executed.

The result for the completed Oct 140 covered call position and the status on the newly established Oct 150 covered call position (including commissions) are each summarized below:

(a) Completed Covered Call Position:
Original Stock Investment 9/18/07 – Purchased 100 shares @ $138.17
= $138.17*100 + $9.95 commission = ($13,826.95)
Change in Stock Value ($150.16-$138.17)*100 = $1,199.00
Change in Options Value = Original Income of $478.30($4.90*100-$10.70 commission)minus Option Buyback Cost $1,170.70($11.60*100+$10.70 commission) = -$692.40 ($478.30-$1,170.70)
Net Change ($1,199.00-$692.40) = $506.60
ANNUALIZED RETURN ON INVESTMENT:
(506.60/13,826.95)*(365/14 days) = 95.5%

(b) New Covered Call Position Established:
10/02/07 Retained 100 FLR at $150.16 = ($15,016)
10/02/07 Sold 1 OCT07 150 Call @ $4.50 = $439.30 ($4.50*100-$10.70 commission)

Annualized Return If Unchanged (ARIU) 58.6%
Annualized Return If Exercised (ARIE) 58.6%
Downside Breakeven Protection 3.0%

In the prior post on this blog titled ‘Rockin’ and Rollin’ – When to ‘Roll Up’ a Covered Call Position’, a specific methodology (more detailed than the ‘net debit to strike price difference’ method is provided for comparison purposes on two possible roll up decision alternatives: (1) maintain the existing position and do nothing; or (2) roll up to a higher strike price. Here’s an excerpt from that post as it pertains to the present Fluor holding:

Here’s the key: Analyze the two option position alternatives as if you don’t already have a short options position.Given that you already own 100 shares of FLR now valued at $150.16, would you prefer for the time period between now (10/02/07) and October expiration (10/20/07) to sell 1 Oct 140 option (priced at $11.60 on 10/02/07) or 1 Oct 150 option (priced at $4.50 on 10/02/07)? The primary factors for the two alternatives are as follows:
(1) Keep the covered call Oct 140 position for the remaining 18 days until October expiration:
Annualized Return If Unchanged (ARIU) = 19.4%
Annualized Return If Exercised (ARIE) = 19.4%
Downside Breakeven Protection = 7.7%
(2) Switch to a covered call Oct 150 position for the remaining 18 days until October expiration:
Annualized Return If Unchanged (ARIU) = 58.6%
Annualized Return If Exercised (ARIE) = 58.6%
Downside Breakeven Protection = 3.0%

As also described in the prior blog post, this advisor’s own personal guideline is to roll up to the higher strike price if two conditions are met: (1) The ARIU is more than 15% greater for the new position [in this case it was 39.2% higher (58.6%-19.4%)]; and (2) The per-day downside protection is >.06% [in this case it was .17% (3.0%/18 days until expiration)]. Since both criteria were met, the decision was made to roll up the covered call position.

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