Wednesday, June 3, 2009

Roll-Up -- Sohu.com Inc

A Covered Calls Advisor Portfolio (CCAP) covered calls position in Sohu.com Inc(SOHU) was rolled-up today (06/03/09) from the Jun09 $60s to the Jun09 $65s. One-half (four out of eight) of the Sohu.com covered calls were rolled-up today. The other four were left at the $60 strike for the time being. The debit-spread transaction was executed as follows:
06/03/09 Buy-to-Close (BTC) 4 SOHU Jun09 $60s @ $6.15
06/03/09 Sell-to-Open (STO) 4 SOHU Jun09 $65s @ $2.89
Net Debit-Spread upon Roll-Up was $3.26 ($6.15 - $2.89)
Note: The price of SOHU was $65.02 today when the debit-spread was transacted, so the remaining time-value was $1.13 [$6.15-($65.02-$60.00)] when this transaction was executed.

The transactions history to date is as follows:
05/19/09 Initial Stock Purchase Transaction -- Bought 400 SOHU @ $54.50
05/19/09 Inital Calls Sold Transaction -- Sold 4 SOHU Jun09 $55.00 Calls @ $3.00
A debit-spread transaction was executed as follows:
05/29/09 Buy-to-Close (BTC) 4 SOHU Jun09 $55s @ $5.84
05/29/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $2.51
Note: The price of SOHU was $59.85 today when the debit-spread was transacted.
06/03/09 Buy-to-Close (BTC) 4 SOHU Jun09 $60s @ $6.15
06/03/09 Sell-to-Open (STO) 4 SOHU Jun09 $65s @ $2.89
Note: The price of SOHU was $65.02 today when the debit-spread was transacted.

The overall performance results(including commissions) for this SOHU covered calls position would be as follows:
Stock Purchase Cost: $21,808.95
($54.50*400+$8.95 commission)

Net Profit:
(a) Options Income: -$1,471.85
= (400*($3.00-$5.84+$2.51-$6.15+$2.89) - 3*$11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised at $65.00): +$4,191.05
= ($65.00-$54.50)*400 - $8.95 commissions

Total Net Profit(If stock price exercised at $65.00): +$2,719.20
= (-$1,471.85 +$0.00 +$4,191.05)

Absolute Return if Exercised at $65.00: +12.5%
= +$2,719.20/$21,808.95
Annualized Return If Exercised (ARIE) +142.2%
= (+$2,719.20/$21,808.95)*(365/32 days)

It should also be noted that this maximum potential annualized return (after the roll-up) of 142.2% is significantly higher than the 103.3% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the $60.00 strike price upon Jun09 expiration.

4 comments:

  1. Jeff P,

    You entered this trade with the intent of capturing 6.79% if it finished ITM. I would be willing to bet that you could have collected nearly that amount on 6/1 when the stock gapped up. My information shows the stock price around $66 and the option around $11, which would have given you a net credit of $55 if you had closed it - same as expiring ITM only 3 weeks early.

    I know you are a 'value' investor, and SOHU is a very good stock, but what are the advantages to rolling you options like you did, and what are you going to do if the stock pulls back to its 20ma at 58.09?

    This is a test...

    Jeff W :)

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  2. Hi Jeff W,

    Since I continue to be bullish about SOHU, my process is to roll-up rather than to sell-out. To answer your second question, if the stock were to pull back to $58 prior to expiration week, I would likely roll-down the $65 strike price back to $60.

    Jeff

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  3. Jeff,

    Why roll up with such a lot of time value in your existing option? Would it not be better to wait closer to expiration?

    Steve

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  4. Steve,
    A very good question. It is a difficult decision, but by rolling-up my remaining time-value actually increased from $1.13 in the old position to $2.98 [$3.00-($65.02-$65.00)] time-value in the new position.
    Jeff

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