Thursday, April 9, 2009

Roll-Up-and-Forward -- Bank of America

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Bank of America(BAC) was rolled-up-and-forward today (04/09/09) from the Apr09 $6.00s to the May09 $9.00s. The debit-spread transaction was executed as follows:

04/09/09 Buy-to-Close (BTC) 5 BAC Apr09 $6.00s @ $3.05
04/09/09 Sell-to-Open (STO) 5 BAC May09 $9.00s @ $1.35
Net Debit-Spread upon Roll-Up-and-Forward was $1.70 ($3.05 - $1.35)

The transactions history to date is as follows:
03/23/09 Bought 500 BAC @ $7.16
03/23/09 Sold 5 BAC Apr09 $6.00 Calls @ $1.76
04/09/09 Buy-to-Close (BTC) 5 BAC Apr09 $6.00s @ $3.05
04/09/09 Sell-to-Open (STO) 5 BAC May09 $9.00s @ $1.35
Net Debit-Spread upon Roll-Up-and-Forward was $1.70 ($3.05 - $1.35)
Note: The price of BAC was $8.95 today when the roll-up-and-out transaction was executed.

The Roll-Up Analyzer used to evaluate the potential roll-up for BAC is shown below:

This 'Analyzer' shows that either roll-up alternative (either rolling-up to the current Apr09 expiration or simulataneously rolling-up-and-forward to the May09 expiration) would be a good decision. The Covered Calls Advisor decided that rolling-up-and-forward to the May09 $9.00 strike price was the preferable alternative. The thought process in support of this decision was as follows: Bank of America stock was up 27% today alone, primarily in sympathy with the upside earnings surprise reported this morning by Wells Fargo. As a result of today's quick, bullish price move by BAC, the implied volatility in the options increased to 121. Consequently, this Advisor decided to lock in this currently available high options premium for another month [the chart above shows that the corresponding potential 'annualized return if the stock price was unchanged'(ARIU) between today and May expiration would be an extremely attractive 148.8%].

The overall performance results(including commissions) for the BAC transactions through the May09 expiration would be as follows:
Stock Purchase Cost: $3,588.95
($7.16*500+$8.95 commission)

Net Profit:
(a) Options Income: +$4.60 (500*($1.76-$3.05+$1.35) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $8.95): +$886.05
= ($8.95-$7.16)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $9.00): +$911.05
= ($9.00-$7.16)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $8.95): +$890.65
= (+4.60 +$0.00 +$886.05)
Total Net Profit(If stock price exercised at $9.00): +$915.65
= (+$4.60 +$0.00 +$911.05)

Absolute Return If Stock Price Unchanged at $8.95 = +24.8%
+$890.65/$3,588.95
Annualized Return If Unchanged (ARIU) +167.7%
(+$890.65/$3,588.95)*(365/54 days)

Absolute Return If Stock Price Exercised at $9.00 = +25.5%
+$915.65/$3,588.95
Annualized Return If Exercised (ARIE) +172.4%
(+$915.65/$3,588.95)*(365/54 days)

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