Wednesday, July 22, 2009

Continuation Transaction -- United States Natural Gas Fund ETF Covered Calls

Last Friday was expiration Friday for July 2009. In a Covered Calls Advisor's blog recent post, it was noted that of the nine covered calls positions for July 2009, four were exercised and the stock was called away. The remaining five Jul09 positions expired out-of-the-money. On Monday it was decided to sell one stock (BAC) and to retain three stocks (CHL, EME, and SOHU) and to establish Aug09 covered calls for each one. A final decision regarding the remaining position in the United States Natural Gas Fund ETF (UNG) was deferred until a later time.

Today this advisor decided to retain the 1000 shares currently held in UNG and to establish Aug09 covered calls against this holding. UNG invests in near-month futures contracts and tracks the price of natural gas. As described last month when the initial covered calls position in UNG was established, "the Covered Calls Advisor believes that natural gas is a cost effective, clean, and abundant alternative fuel and will be an increasingly important resource in fulfilling future U.S. energy needs. At its current price, this advisor further believes that Nat Gas now trades at the lower end of its likely price range for the next several months." The price of natural gas has remained at a price level similar to where it traded one month ago when the initial covered calls were established, and my conviction remains unchanged that nat gas prices will increase during the next several months. Consequently, a continuation of the prior UNG covered calls position was established today with a $14.00 strike price and an Aug09 expiration.

The transactions history to date and some potential investment results are detailed below.

United States Natural Gas Fund ETF (UNG) -- Continuation
The transactions history to date is as follows:
06/30/09 Bought 1000 UNG @ $13.92
06/30/09 Sold 10 UNG Jul09 $14.00 Calls @ $.75
07/18/09 Jul09 Options Expired
The price of UNG closed at $13.16 on expiration Friday.
07/22/09 Sell-to-Open (STO) 10 UNG Aug09 $14.00 Calls @ $.75
The price of UNG was $13.73 today when this transaction was executed.

The overall performance results(including commissions) for the UNG transactions would be as follows:
Stock Purchase Cost: $13,928.95
($13.92*1000+$8.95 commission)

Net Profit:
(a) Options Income: +$1,467.10
= (1000*($.75+$.75) - 2*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock unchanged at $13.73): -$198.95
= ($13.73-$13.92)*1000 - $8.95 commissions
(c) Capital Appreciation (If exercised at $14.00): +$71.05
= ($14.00-$13.92)*1000 - $8.95 commissions

Total Net Profit(If stock price unchanged at $13.73): +$1,268.15
= (+$1,467.10 +$0.00 -$198.95)
Total Net Profit(If stock price exercised at $14.00): +$1,538.15
= (+$1,467.10 +$0.00 +$71.05)

Absolute Return if Stock Price Unchanged at $13.73: +9.1%
= +$1,268.15/$13,928.95
Annualized Return If Unchanged (ARIU): +62.7%
= (+$1,268.15/$13,928.95)*(365/53 days)

Absolute Return if Exercised at $14.00: +11.0%
= +$1,538.15/$13,928.95
Annualized Return If Exercised (ARIE): +76.0%
= (+$1,538.15/$13,928.95)*(365/53 days)

1 comment:

  1. Hi Jeff, thanks for posting all this great material. I also have a covered call position in UNG (Sept@14) and I was wondering what do you expect UNG to do in the near future and how are you adjusting your covered call? Thanks.