Wednesday, September 23, 2009

Establish Family Dollar Stores Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Family Dollar Stores Inc (FDO) covered calls as follows:

Established Family Dollar Stores Inc(FDO) Covered Calls for Oct09:
09/23/09 Bought 300 FDO @ $26.65
09/23/09 Sold 3 FDO Oct09 $27.50 Calls @ $.80

Family Dollar Stores, Inc. operates a chain of over 6,000 self-service retail discount stores for low to lower-middle income consumers in the United States.
This Advisor currently has a slightly cautious view towards domestic consumer spending, but a recent sell-off in FDO resulting from below-forecast 2nd quarter same-store-sales seems overdone. The Covered Calls Advisor thinks that the modest sales shortfall is attributable primarily to (1) the one-year anniversary of the consumer tax rebates in 2008; and (2) some lack of clarity for shoppers resulting from some store layout changes. It is expected that these changes were temporary and that 3%+ same-store-sales will return for FDO in the next several quarters. Consequently, a slightly out-of-the-money position was established in FDO for the Oct09 expiration.

Below is the Covered Calls Advisor's 'Buy Alerts' spreadsheet for FDO. It scored above the threshold of 20.0 with a Total Points rating of 21.42.

Note: For expanded view, left click on the spreadsheet above.

Some potential results from this FDO covered calls transaction are as follows:

Absolute Return if Unchanged at $26.65: +3.0%
= ($.80/$26.65)
Annualized Return If Unchanged (ARIU): +45.7%
= ($.80/$26.65)*(365/24 days)

Absolute Return if Exercised at $27.50: +6.2%
Annualized Return If Exercised (ARIE): +94.2%
=[($.80+($27.50-$26.65)]/$26.65]*(365/24 days)

Downside Breakeven Price Point: $25.85
Downside Breakeven Protection: 3.0%