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Monday, December 8, 2008

Roll-Up-And-Out -- Humana Inc (HUM)

The Covered Calls Advisor Portfolio (CCAP) covered call position in Humana Inc(HUM) was rolled-up-and-out today (12/08/08) from the Dec08 $25s to the Jan09 $30s. The spread transaction was executed as follows:

12/08/08 Buy-to-Close (BTC) 10 HUM Dec08 $25s @ $5.50
12/08/08 Sell-to-Open (STO) 10 HUM Jan09 $30s @ $3.10
Net Debit on Roll Up $2.40 ($5.50-$3.10)
Note: The price of HUM was $30.24 today when the call options spread transaction was executed.

This transaction meets the Covered Calls Advisor criterion that the average daily rate-of-decay for the new position is more than 200% higher than that for retaining the existing position. In fact, as described in detail below, today's options spread transaction achieved a very attractive increase in the average daily rate of decay of 229.5%, which was calculated as follows:
As of today there are exactly 12 calendar days remaining until Dec08 options expiration. For the existing HUM Dec08 $25 call, the 'average daily rate-of-decay' of the short call option position was $.0217 [total time value of $.26 ($5.50-($30.24-$25.00)) divided by 12 days remaining until Dec08 expiration]. This $.0217 per day [which alternatively can be thought of as $2.17 per day per option contract written(since each contract represents 100 shares of stock)] represents the average daily income that will be squeezed out of the remaining time value of the option between today and the option expiration date. This $.0217 per day from retaining the existing position is then compared against the 'average daily rate-of-decay' for a new Jan09 $30 strike alternative position. For this alternative, the 'avg daily rate-of-decay' is $.0715 which is obtained from the time value of $2.86 [$3.10-($30.24-$30.00)] divided by the 40 days remaining until Jan09 expiration. This roll-up-and-out alternative has a 229.5% ($.0715-$.0217)/$.0217 greater average daily rate-of-decay than the existing position if the existing position were to be retained until expiration.

A summary of the HUM transactions so far is as follows:
11/24/08 Initial Stock Purchase Transaction -- Bought 1000 HUM @ $25.55
11/24/08 Inital Calls Sold Transaction -- Sold 10 HUM Dec08 $25.00 Calls @ $2.90
Roll-Up-And-Out Spread Transaction:
12/08/08 Buy-to-Close (BTC) 10 HUM Dec08 $25s @ $5.50
12/08/08 Sell-to-Open (STO) 10 HUM Jan09 $30s @ $3.10
Net Debit on Roll Up was $2.40 ($5.50-$3.10)
Note: Price of HUM was $30.24 today when the call options spread transaction was executed.

The overall performance results(including commissions) for the HUM transactions through the Jan09 expiration would be as follows:

Stock Purchase Cost: $25,558.95
($25.55*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$450.35 (1000*($2.90-$5.50+$3.10) - 3*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$4,432.10
= ($30.00-$25.55)*1000 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $30.00): +$4,882.45
= (+$450.35 +$0.00 +$4,432.10)

Annualized Return If Exercised (ARIE) +129.1%
(+$4,882.45/$25,558.95)*(365/54 days)

1 comment:

  1. Thanks for the roll-up and out explanation. I do this on occassion, but your logic was helpful for me putting together a spreadsheet for regulary analyzing when to execute..

    ReplyDelete