Friday, August 15, 2008

Continuation Transaction -- Humana Inc.

Late in the trading day today (expiration Friday), a roll-up-and-out transaction was made to continue the covered calls position in Humana (HUM):
08/15/08 Bought to Close 2 Aug08 $45.00 Calls @ $4.90
08/15/08 Sold to Open 2 Sep08 $50.00 Calls @ $2.40

After purchasing HUM in February, the price declined dramatically shortly thereafter in March when it was determined that the New Medicare Prescription Program policies initiated Jan 1st this year were sold for prices lower than what the subsequent prescription reimbursments would have required for profitability. Company earnings this year are of course being adversely effected as a result of the losses in this new program. Since initial rates for this program were guaranteed for one year, rate increases to enable an acceptable profit margin will commence beginning in Jan 2009. In this advisor's opinion, this one-time pricing error does not qualify as a 'fundamental breakdown' in the investment case for Humana. Consequently, as long as this company's fundamentals continue to remain strong, this currently losing covered calls position will continue to be 'managed' -- hopefully back towards profitability.

The Transactions History to date is as follows:
02/20/08 Initial Stock Purchase Transaction -- Bought 200 HUM @ $68.65
02/20/08 Initial Calls Sold Transaction -- Sold 2 HUM Mar08 $70 Calls @ $2.20
03/22/08 Mar08 Options Expired
03/24/08 Covered Calls Continuation Transaction -- Sold 2 Apr08 $50 Calls @ $1.25
Note: Price of HUM was $46.10 when the calls were sold today.
04/19/08 Apr08 Options Expired
04/28/08 Covered Calls Continuation Transaction -- STO 2 May08 $45 Calls @ $2.10
Note: Price of HUM was $45.35 when the calls were sold today.
05/17/08 May08 Options Expired
05/29/08 Covered Calls Continuation Transaction -- STO 2 Jun08 $50 Calls @ $2.50
Note: Price of HUM was $50.80 when the calls were sold today.
06/21/08 Jun08 Options Expired
06/25/08 Covered Calls Continuation Transaction -- STO 2 Jul08 $45 Calls @ $.65
Note: Price of HUM was $41.95 when the calls were sold today.
07/19/08 July08 Options Expired
07/23/08 Covered Calls Continuation Transaction -- Sold 2 HUM Aug08 $45.00 Calls
@ $1.30
08/15/08 Covered Calls Continuation Transaction -- Bought to Close 2 Aug08 $45.00 Calls @ $4.90
08/15/08 Covered Calls Continuation Transaction -- Sold to Open 2 Sep08 $50.00 Calls @ $2.40
Note: Price of HUM was $49.85 this afternoon (Expiration Friday) when this roll-up-and-out transaction was made.


If exercised, the overall performance results(including commissions) for the HUM positions through the Sep08 expiration would be as follows:

Stock Purchase Cost: $13,739.95
($68.65*200+$9.95 commission)

Net Profit:
(a) Options Income: +$1,416.40 = 200*($2.20+$1.25+$2.10+2.50+$.65+1.30-$4.90+$2.40) - 8*$10.45 commissions
(b) Dividend Income: $0
(c) Capital Appreciation(If exercised): -$3,747.90
= ($50.00-$68.65)*200 - 2*$8.95 commissions

Total Net Profit(If stock price exercised): -$2,331.50
= (+$1,416.40+$0-$3,747.90)

Annualized Return If Exercised (ARIE) -29.1%
(-$2,331.50/$13,739.95)*(365/213 days)

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