Monday, April 20, 2009

Establish Archer Daniels Midland Co. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Archer Daniels Midland Co.(ADM) covered calls.

A summary of the transactions is as follows:
Established Archer Daniels Midland Co. Covered Calls for May09:
04/20/09 Bought 400 ADM @ $25.27
04/20/09 Sold 4 ADM May09 $25.00 Calls @ $1.70

Archer Daniels Midland Company procures, transports, stores, processes, and merchandises agricultural commodities and products primarily in the United States.

On the Covered Calls Advisor's 'Buy Alerts' spreadsheet, ADM received a total of 7 points (out of a maximum of 9 points). This Advisor likes to see at total of at least 7 points for a company to qualify as a potential investment. The two categories in which ADM did not meet the desired thresholds are:
(1) Return-on-Equity of 18.4% is below the desired 20.0% threshold, but it is reasonably close and is still well above the S&P 500 ROE average.
(2) The 51.4% debt-ratio is well above the maximum desired of 30.0%, but this deficiency is more than compensated for by the very high cash position and free-cash-flow results.

In addition to the 'Buy Alerts' worksheet indicators, a review of the call option chain for ADM revealed that the premiums are very attractive at this time -- the implied volatility for the May09 $25 strike was 57.5% at the time this transaction was executed, which is substantially higher than the 47.6% historic volatility for ADM over the prior two-month period. As shown below, this provides a very attractive potential annualized return for these ADM covered calls:

Absolute Return if Exercised at $25.00: +5.7%
= [$1.70-($25.27-$25.00)]/$25.27
Annualized Return if Exercised: +87.1%
Downside Breakeven Price Point: $23.57
Downside Breakeven Protection: 6.7%