Monday, May 4, 2009

Roll-Up -- Sohu.com Inc

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Sohu.com Inc (SOHU) was rolled-up today (05/04/09) from the May09 $50s to the May09 $60s. The debit-spread transaction was executed as follows:

05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the debit-spread was transacted, so the remaining time-value was $.30 [$8.95-($58.65-$50.00)] when this transaction was executed.

Sohu.com reported quarterly earnings today that were substantially better than even the most optimistic analysts' projections. This Chinese internet stock has been very bullish since originally purchased in February for the CCAP, and has reacted with a further move upward today in reaction to the positive earnings report.

This is the Roll-Up Analysis table that is currently under development for use by the Covered Calls Advisor to aid in analyzing roll-up and roll-down decisions. The table shown here pertains to this Sohu.com roll-up transaction.

The two key variables are:
(1) aRIU: This stands for 'Annualized Return If Unchanged'. The 83.6% represents the incremental annualized return that would be achieved for the next 12 days until May09 expiration by rolling-up from the $50 to the $60 strike, assuming that the current $58.65 price of SOHU remains at $58.65 upon expiration on May 15th.
(2) Payback: This 16.5% represents the additional absolute profit percent that would be achieved if the new position is exercised upon May09 expiration. The 16.5% can also be thought of in terms of dollars; that is, $165 additional profit per 100 shares owned. So with 400 shares of SOHU, this roll-up provides the potential to increase the return on this covered calls position by $660 ($1.65*400 shares) between today and May09 expiration 12 days from now on 5/16/09.

The transactions history to date is as follows:
02/24/09 Bought 400 SOHU @ $44.617
02/24/09 Sold 4 SOHU Mar09 $45.00 Calls @ $3.20
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 4 SOHU Apr $45s @ $1.45
Note: The price of SOHU was $40.10 today when the call options were sold.
04/13/09 Buy-to-Close (BTC) 4 SOHU Apr09 $45.00s @ $5.20
04/13/09 Sell-to-Open (STO) 4 SOHU May09 $50.00s @ $4.30
Net Debit-Spread upon Roll-Up-and-Forward was $.90 ($5.20 - $4.30)
Note: The price of SOHU was $49.90 today when the call options were sold.
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the call options were sold.

The overall performance results(including commissions) for the SOHU transactions are as follows:
Stock Purchase Cost: $17,855.75
($44.617*400+$8.95 commission)

Net Profit:
(a) Options Income: -$1,341.80 (400*($3.20+$1.45-$5.20+$4.30-$8.95+$1.95) - 4*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $58.65): +$5,604.25
= ($58.65-$44.617)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$6,144.25
= ($60.00-$44.617)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $58.65): +$4,262.45
= (-$1,341.80 +$0.00 +$5,604.25)
Total Net Profit(If stock price exercised at $60.00): +$4,802.45
=(-$1,341.80 +$0.00 +$6,144.25)

Absolute Return if Stock Price Unchanged at $58.65: +23.9%
= +$4,262.45/$17,855.75
Annualized Return If Stock Price Unchanged (ARIU) +107.6%
=(+$4,262.45/$17,855.75)*(365/81 days)

Absolute Return if Exercised at $60.00: +26.9%
= +$4,802.45/$17,855.75
Annualized Return If Exercised (ARIE) +121.2%
=(+$4,802.45/$17,855.75)*(365/81 days)

8 comments:

  1. do you plan on rolling up China mobile too?

    ReplyDelete
  2. Am watching CHL daily. Will likely roll-up to May09 $50 if the price of CHL gets close to $50 sometime this week. If it stays below $50 this week, but gets close to $50 near the end of next week (expiration week), I'd likely roll-up-and-out then to the Jun09 $50 strike.
    Jeff

    ReplyDelete
  3. jeff,

    Don't u expect you CHL shares to get called away this friday?

    ReplyDelete
  4. Yes. Thanks for the reminder:
    ($.9058 ex-div on 5/11). The stock will certainly be called away early on Friday. I'll make a decision on Thursday to either roll-up to the $50 strike or allow the stock to get called away. Thanks for giving me a heads-up on this one.
    Jeff

    ReplyDelete
  5. No problem, that's why i was asking in the first place -- since the decision was coming up this week.

    I once had a covered call be $3 in the money (the day it expired) and not called away -- it was the oddest thing. Although it's only happened once in 10 years

    ReplyDelete
  6. Jeff

    Do you think there is a chance they will call it in earlier than friday? I wonder what May 45 Calls will be on thursday and the June 50 calls....

    ReplyDelete
  7. Yes, there is certainly a good chance that it would be called away before Friday since the dividend payment is currently more than the time-value remaining in the May09 $45 call option.
    Jeff

    ReplyDelete
  8. So regretably, I BTC 4 CHLEI at 3.50 and sold 4 CHLEI at 2.

    sad thing is....

    yesterday I had a chance to BTC at 2.80 and sell at 1.60 gap went up sigh...

    ReplyDelete