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Monday, February 2, 2009

Roll Up -- Humana Inc.

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Humana Inc(HUM) was rolled-up today (02/02/09) from the Feb09 $35s to the Feb09 $40s.

The spread transaction was executed as follows:
02/02/09 Buy-to-Close (BTC) 10 HUM Feb09 $35s @ $5.48
02/02/09 Sell-to-Open (STO) 10 HUM Feb09 $40s @ $1.88
Net Debit on Roll Up $3.60 ($5.48-$1.88)

The ‘net debit to strike price difference ratio’ was 72% [($5.48-$1.88)/($40-$35)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%.

The stock is reacting favorably today to the 4th quarter earnings release. Although 4th quarter EPS was below estimates, revenues exceeded plan and, more importantly, the company maintained its 2009 EPS estimates of $5.90-$6.10. An additional reason for rolling up is the liklihood of ongoing stock price appreciation for HUM in 2009. As a result, the Covered Calls Advisor currently plans to retain the stock for continuing to write covered calls against the Humana stock after the Feb09 expiration. Rolling-up to the $40 strike price increases the likelihood that the HUM stock will be retained at Feb09 expiration thus making it slightly easier to then simply sell a Mar09 call to move the HUM covered calls forward from February to March.

The Transactions History to date 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
01/17/09 Jan09 Options Expired
01/21/09 Sell-to-Open (STO) 10 HUM Feb09 $35s @ $1.40
Note: Price of HUM was $32.87 when this transaction was executed.
Roll-Up Spread Transaction:
02/02/09 Buy-to-Close (BTC) 10 HUM Feb09 $35s @ $5.48
02/02/09 Sell-to-Open (STO) 10 HUM Feb09 $40s @ $1.88
Note: The price of HUM was $40.02 today when the roll-up transaction was executed.

The overall performance results(including commissions) for the HUM transactions through the Feb09 expiration would be as follows:

Stock Purchase Cost: $25,558.95 ($25.55*1,000+$8.95 commission)
Net Profit:
(a) Options Income: -$5,182.25 (1000*($2.90-$5.50+$3.10-$5.30+$1.90+$1.40-$5.48+$1.88) - 5*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$14,441.05 = ($40.00-$25.55)*1000 - $8.95 commissions

Total Net Profit(If stock price exercised at $40.00): +$9,258.80
= (-$5,182.25 +$0.00 +$14,441.05)

Absolute Return If Exercised = +36.2%
Annualized Return If Exercised (ARIE) +148.6%
(+$9,258.80/$25,558.95)*(365/89 days)

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