Thursday, March 19, 2009

Roll-Up-and-Forward -- BHP Billiton LTD ADR

The Covered Calls Advisor Portfolio (CCAP) covered calls position in BHP Billiton LTD ADR(BHP) was rolled-up-and-forward today (03/19/09) from the Mar09 $37.50s to the Apr09 $45s.

The spread transaction was executed as follows:
03/19/09 Buy-to-Close (BTC) 1 BHP Mar09 $37.50s @ $7.50
03/19/09 Sell-to-Open (STO) 1 BHP Apr09 $45s @ $3.10
Net Debit on Roll Up $4.40 ($7.50-$3.10)

As shown below, the 'Roll-Up Analyzer' worksheet was used to evaluate the desirability of the potential roll-up transaction. The two key criteria analyzed are:
1. Roll-Up Strike Price Percent Change -- The Covered Calls Advisor's criteria here is that the roll-up strike price percent change should be greater than 10%. In this instance, the actual percentage is 20.0% so this criteria is achieved.
2. The second criteria is termed as 'Current Price Near ATM' on the spreadsheet below. Here, a comparison is made between two annualized returns. The annualized return if the stock price is unchanged (ARIU) for the possible new covered calls position is compared with the ARIU for the remaining 2 days for the existing position. If the new position has an annualized return potential that is more than 35% more than the current position, then switching to the new position is a 'Yes'. In this case, as shown on the worksheet below, the difference is +43.4%(84.0%-40.6%), so a roll-up is desirable in this instance.

Now, a decision needs to be made whether to roll-up within the same expiration month or whether to roll-forward to the next expiration month. According to the Covered Calls Advisor's criteria, if there is less than 1 week remaining until the current position's expiration, then the roll-up will be done to the next expiration month; which is true in this instance since there are currently only 2 days remaining until Mar09 expiration.

This roll-up option spread was entered as a good-til-cancelled limit order with a spread of $4.10. The order was executed today when the price of BHP stock was at $44.90.

The Transactions History to date for the BHP covered call is as follows:
02/25/09 Bought 100 BHP @ $36.75
02/25/09 Sold 1 BHP Mar09 $37.50 Call @ $2.90
03/19/09 Buy-to-Close (BTC) 1 BHP Mar09 $37.50s @ $7.50
03/19/09 Sell-to-Open (STO) 1 BHP Apr09 $45s @ $3.10
Note: The price of BHP was $44.90 today when this transaction was executed.

The overall performance results(including commissions) for the BHP transactions through the Apr09 expiration would be as follows:

Stock Purchase Cost: $3,683.95
($36.75*100+$8.95 commission)

Net Profit:
(a) Options Income: -$169.40 (100*($2.90-$7.50+$3.10) - 2*$9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $44.90): +$806.05
= ($44.90-$36.75)*100 - $8.95 commissions
(c) Capital Appreciation (If exercised at $45.00): +$816.05
= ($45.00-$36.75)*100 - $8.95 commissions

Total Net Profit(If stock price unchanged at $44.90): +$636.65
= (-$169.40 +$0.00 +$806.05)
Total Net Profit(If stock price exercised at $45.00): +$646.65
= (-$169.40 +$0.00 +$816.05)

Absolute Return If Stock Price Unchanged at $44.90 (ARIU) = +17.3%
Annualized Return If Unchanged (ARIU) +121.3%
(+$636.65/$3,683.95)*(365/52 days)
Absolute Return If Exercised = +17.6%
Annualized Return If Exercised (ARIE) +123.2%
(+$646.65/$3,683.95)*(365/52 days)