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Friday, January 2, 2009

Roll-Up -- Potash Corp of Saskatchewan Inc (POT)

The Covered Calls Advisor Portfolio (CCAP) covered call position in Potash Corp of Saskatchewan Inc(POT) was rolled-up today (01/02/09) from the Jan09 $65s to the Jan09 $75s.

The spread transaction was executed as follows:
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
Net Debit on Roll Up $7.00 ($11.35-$4.35)

The ‘net debit to strike price difference ratio’ was 70% [($11.35-$4.35)/($75-$65)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. The decision to roll-up POT was a difficult one -- Potash is a volatile stock and the dramatic increase in the value of the stock in only the past few days could easily be matched by an equally dramatic move the other way in a short time period. Ultimately, it was decided that this risk was worth it considering the substantial additional time value in the remaining option premium that is achieved by transacting the roll-up.

A summary of the POT transactions so far is as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 200 POT @ $65.84
12/22/08 Inital Calls Sold Transaction -- Sold 2 POT Jan09 $65.00 Calls @ $5.90
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
The overall performance results(including commissions) for the POT transactions through the Jan09 expiration would be as follows:

Stock Purchase Cost: $13,176.95 ($65.84*200+$8.95 commission)
Net Profit:
(a) Options Income: -$188.65 (200*($5.90-$11.35+$4.35) - 3*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$1,982.10 = ($75.00-$65.00)*200 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $75.00): +$1,793.45
= (-$188.65 +$0.00 +$1,982.10)

Absolute Return If Exercised = +13.6%
Annualized Return If Exercised (ARIE) +191.1%
(+$1,793.45/$13,176.95)*(365/26 days)


  1. Jeff,
    Question on your thoughts on rolling. You comment that you like to be below 70% when you roll. But I don't see where to you take into account the original premium you sold. Like on POT I believe the original premium was 5.90. Wouldn't that factor into your decision somewhere?

  2. I try not to consider what I paid for the stock or received in option premium when I originally established the position. Here is an excerpt from a prior post on this topic:
    "Notice that there is no mention above of when the existing FLR covered calls were established or the prices of the stock and calls when this covered calls position was originally established. It is only natural for us to want to know what our initial cost basis is in the existing position. However, including this historical information in our decision-making thought process actually distorts that process. What was paid initially and how much profit (or loss) has been achieved so far is irrelevant for us today when analyzing whether to roll-up-and-out or to simply maintain our existing position. The concept of disregarding past transactions and price changes that occur prior to today is a concept referred to by economists as a ‘sunk cost’. A sunk cost is simply a cost that has already been incurred. It’s past. It’s history. In short, it's irrelevant when trying to answer the question today as to whether to simply retain the existing position or whether to roll-up-and-out to another position."

    If you'd like to read the entire post:

    It is difficult to disregard the past when making these decisions but that should be our objective.

    Hope this has been helpful.


  3. Hi Jeff,

    came across your blog from viewing optionpremiumcollector's blog.
    i have been studying options only very seriously for about a week now, covered calls for about 6 or 7 hours, looking forward to reading your insights,