The Covered Calls Advisor Portfolio (CCAP) position in American Oriental Bioengineering(AOB) was closed out today (5/07/09). This advisor has not written any calls against AOB since Feb09 expiration since the stock was wallowing in the low-$4 range and the $5 option premiums available were very small. Since AOB has participated fully in the market's recent bull move, this advisor has decided to take profits in AOB and move on to something else. Although I continue to be bullish on AOB's valuation and future prospects, there are two factors that caused me to decide to exit the position at this time:
1. The primary reason is the difficulty of finding a suitable strike price to sell on a low-priced stock holding. By 'low-priced', I'm referring to stocks below about $10. The "% difference" between the strike-price-spreads is simply too wide, which makes covered calls position management very difficult. For example, the '% difference' between the $5.00 and the next available strike which is $7.50 is a very large 50% [($7.50-$5.00)/$5.00]. Contrast this against a stock where the nearest strikes are $60.00 and $65.00 -- the % difference is 8.33% [($65-$60)/$60]. The lower the '% difference' the greater our flexibility in covered calls position management. Going forward, this advisor will be avoiding taking covered calls positions in any equity that is priced below $10.
2. A second reason for selling out now is that AOB will be releasing quarterly earnings next Monday. Although a good earnings report is the most likely scenario, the added uncertainty makes exiting the position now a prudent course of action.
The transactions history was as follows:
01/20/09 Initial Stock Purchase Transaction -- Bought 500 AOB @ $4.66
01/20/09 Inital Calls Sold Transaction -- Sold 5 AOB Feb09 $5.00 Calls @ $.30
02/21/09 Feb09 Options expiration. Stock priced at $4.14 upon expiration.
05/07/09 Closing Transaction -- Sold 500 AOB @ $5.3024
The overall performance results(including commissions) for the AOB transactions are as follows:
Stock Purchase Cost: $2,338.95
(a) Options Income: +$137.30 (500*$.30 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$312.25
= ($5.3024-$4.66)*500 - $8.95 commissions
Total Net Profit: +$449.55
= (+$137.30 +$0.00 +$312.25)
Absolute Return = +19.2%
Annualized Return: +65.6%
= (+$449.55/$2,338.95)*(365/107 days)