Wednesday, April 15, 2009

Roll-Up-and-Forward -- UnitedHealth Group Inc

The Covered Calls Advisor Portfolio (CCAP) covered calls position in UnitedHealth Group Inc(UNH) was rolled-up-and-forward today (04/15/09) from the Apr09 $22.00s to the May09 $25.00s. The debit-spread transaction was executed as follows:

04/15/09 Buy-to-Close (BTC) 3 UNH Apr09 $22.00s @ $3.11
04/15/09 Sell-to-Open (STO) 3 UNH May09 $25.00s @ $1.94
Net Debit-Spread upon Roll-Up-and-Forward was $1.17 ($3.11 - $1.94)
Note: The price of UNH was $25.06 today when the debit-spread was transacted.

The Transactions History to date for the UNH covered calls is as follows:
03/10/09 Bought 300 UNH @ $18.96
03/10/09 Sold 3 UNH Mar09 $19.00 Calls @ $1.20
Roll-Up-and-Forward debit-spread transaction:
03/19/09 Buy-to-Close (BTC) 3 UNH Mar09 $19.00s @ $3.05
03/19/09 Sell-to-Open (STO) 3 UNH Apr09 $45s @ $1.75
03/31/09 $9.00 Ex-Dividend ($.03*300 shares)
Roll-Up-and-Forward debit-spread transaction:
04/15/09 Buy-to-Close (BTC) 3 UNH Apr09 $22.00s @ $3.11
04/15/09 Sell-to-Open (STO) 3 UNH May09 $25.00s @ $1.94

The Roll-Up Analyzer used to evaluate the potential roll-up for UNH is shown below:
This 'Analyzer' shows that the roll-up-and-forward transaction was the preferred alternative. With only three days remaining until Apr09 expiration, the payback remaining for rolling-up to the Apr09 $25 strike is insufficient to justify the transaction. There are now 31 days until May09 expiration. The Covered Calls Advisor's key criterion in analyzing whether or not to roll-up to the next strike price is if the potential 'Annualized Return if Stock Price Unchanged' (ARIU) increase is greater than 50%? That is, what is the difference between the ARIU for the remaining 3 days of the current position compared with the ARIU for the remaining 31 days for the proposed new position? In this case, and as shown on the worksheet, the difference is +66.8%(91.1%-24.3%). Since 66.8% exceeds the 50% threshold, the decision was made to execute the roll-up-and-forward transaction in this instance.

The overall performance results(including commissions) for the UNH transactions through the May09 expiration would be as follows:

Stock Purchase Cost: $5,696.95
($18.96*300+$8.95 commission)

Net Profit:
(a) Options Income: -$414.60 (300*($1.20-$3.05+$1.75-$3.11+$1.94) - 3*$11.20 commissions)
(b) Dividend Income: +$9.00
(c) Capital Appreciation (If exercised at $25.00): +$1,803.05
= ($25.00-$18.96)*300 - $8.95 commissions

Total Net Profit(If stock price exercised at $25.00): +$1,397.45
= (-$414.60 +$9.00 +$1,803.05)

Absolute Return If Exercised = +24.5%
Annualized Return If Exercised (ARIE) +133.6%
(+$1,397.45/$5,696.95)*(365/67 days)