Tuesday, October 20, 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. You might recall that covered calls positions in AHL were called away previously upon both Sep09 and Oct09 expirations in the CCAP with annualized return results of 32.1% and 28.75% respectively. The new position established today was as follows:

Established Aspen Insurance Holdings Ltd.(AHL) Covered Calls for Nov09:
10/20/09 Bought 300 AHL @ $28.20
10/20/09 Sold 3 AHL Nov09 $30.00 Calls @ $.35

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 might earn $4.00 per share this fiscal year. The next quarterly earnings report will be issued in another week and the uncertainty that accompanies earnings reports for any company is certainly also evident in this case. However, this advisor believes there is a strong likelihood that AHL's results will meet or exceed analysts' current forecasts. In addition, at AHL's current price the stock offers a very good value in that it now trades at an historically low 80% of its book value. Also of importance, we have 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 already substantial AHL position. For these bullish reasons, it was decided to establish a moderately bullish out-of-the-money position in this Aspen Insurance Holdings investment.

Some possible overall performance results(including commissions) for the AHL transactions would be as follows:
Stock Purchase Cost: $8,468.95
= ($28.20*300+$8.95 commission)

Net Profit:
(a) Options Income: +$93.80
= (300*$.35 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $28.20): -$8.95
= ($28.20-$28.20)*300 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $30.00): +$531.05
= ($30.00-$28.20)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $28.20): +$84.85
= (+$93.80 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $30.00): +$624.85
= (+$93.80 +$0.00 +$531.05)

Absolute Return if Stock Price Unchanged at $28.20: +1.0%
= +$84.85/$8,468.95
Annualized Return If Unchanged (ARIU): +11.4%
= (+$84.85/$8,468.95)*(365/32 days)

Absolute Return if Stock Exercised at $30.00: +7.4%
= +$624.85/$8,468.95
Annualized Return If Exercised (ARIE): +84.2%
= (+$624.85/$8,468.95)*(365/32 days)