Tuesday, December 30, 2008

Roll Up -- Humana Inc (HUM)

The Covered Calls Advisor Portfolio (CCAP) covered call position in Humana Inc(HUM) was rolled-up today (12/30/08) from the Jan09 $30s to the Jan09 $35s.

The spread transaction was executed as follows:
12/30/08 Buy-to-Close (BTC) 10 HUM Jan09 $30s @ $5.30
12/30/08 Sell-to-Open (STO) 10 HUM Jan09 $35s @ $1.90
Net Debit on Roll Up $3.40 ($5.30-$1.90)

The ‘net debit to strike price difference ratio’ was 68% [($5.30-$1.90)/($35-$30)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. An additional reason for rolling up is that I like the potential for ongoing appreciation in HUM in 2009 and currently plan to retain the stock for continuing to write future covered calls against the Humana stock upon the Jan09 expiration. Rolling-up to the $35 strike price increases the likelihood that the HUM stock will be retained at Jan09 expiration thus making it slightly easier to then simply sell a Feb09 call to move the HUM covered calls forward from January to February.

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
Roll-Up Spread Transaction:
12/30/08 Buy-to-Close (BTC) 10 HUM Jan09 $30s @ $5.30
12/30/08 Sell-to-Open (STO) 10 HUM Jan09 $35s @ $1.90

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: -$1,052.25 (1000*($2.90-$5.50+$3.10-$5.30+$1.90) - 3*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$9,432.10= ($35.00-$25.55)*1000 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $35.00): +$8,379.85
= (-$1,052.25 +$0.00 +$9,432.10)

Absolute Return If Exercised = +32.8%
+$8,379.85/$25,558.95
Annualized Return If Exercised (ARIE) +221.6%
(+$8,379.85/$25,558.95)*(365/54 days)

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