Friday, September 18, 2009

Establish Aspen Insurance Holdings Ltd. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Aspen Insurance Holdings Ltd.(AHL) covered calls as follows:

Established Aspen Insurance Holdings Ltd.(AHL) Covered Calls for Oct09:
09/18/09 Bought 500 AHL @ $26.16
09/18/09 Sold 5 AHL Oct09 $25.00 Calls @ $1.80

Aspen Insurance Holdings Limited, through its subsidiaries, provides insurance and reinsurance products and services in the United Kingdom, the United States, and internationally. AHL's primary business is in catastrophe reinsurance including earthquakes, hurricanes, and floods. Pricing trends are currently positive relative to last year in several of these business areas. Moreover, AHL is continuing to grow and diversify into additional insurance and reinsurance areas while managing its own investment portfolio conservatively. It continues to represent an attractive, value-oriented investment that is expected to earn $4.00 per share this fiscal year. In addition, at AHL's current price the stock trades at only about 80% of its book value. Importantly, we have just passed the traditional peak of the hurricane season without a major event and the presence of the El Nino effect bodes well for the remainder of the season. Another encouraging fact is that investing guru David Einhorn (Greenlight Capital) has taken a large position in several reinsurers and AHL is now one of his top holdings. It is also encouraging that the latest reporting quarter (2nd qtr 2009) shows that he added further to his AHL position.

For this transaction, you might notice that the CCAP already has a Sep09 covered calls position that will probably be exercised today, and you might wonder why that position was not rolled-out to Oct09 via a debit-spread transaction (as was done with the ACN position posted earlier today). The reason is because of the relatively low options liquidity for AHL which results in a relatively wide bid/ask spread on the options. When near the expiration date, this advisor prefers to roll only when the options bid/ask spread is $.10 or less. If greater than $.10, then the existing position is allowed to be exercised and a separate covered calls transaction is made to establish the new next-month position.

Some potential results from this transaction are:
Absolute Return if Exercised at $25.00: +2.4%
= [$1.80 - ($26.16 - $25.00)]/$26.16
Annualized Return if Exercised(ARIE): +30.8%
= [$1.80 - ($26.16 - $25.00)]/(365/29 days)

Downside Breakeven Price Point: $24.36
Downside Breakeven Protection: 6.9%
This in-the-money position also provides up to 4.4% [($26.16-$25.00)/$26.16] downside protection available while still achieving the maximum potential annualized return-on-investment of 30.8% from this covered calls position.