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Tuesday, October 27, 2009

Establish Intel Corporation Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Intel Corporation (INTC) covered calls as follows:

Established INTC Corporation (INTC) Covered Calls for Nov09:
10/27/09 Bought 700 INTC @ $19.70
10/27/09 Sold 7 INTC Nov09 $19.00 Calls @ $.88

This position represents a covered calls "ex-dividend early exercise strategy". INTC will go ex-dividend on Nov 4th with a quarterly dividend payment of $.14. So for this position, analysis of the potential returns for two scenarios is made: (1) an early exercise; or (2) a later exercise at the Nov09 expiration date. It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date (November 3rd in this case) only if the $.14 dividend amount is greater than the time value remaining in the call option at that time. It should be noted that for this covered calls position, a potential exercise under either scenario provides a satisfactory return-on-investment result, although an early exercise provides a higher annualized return (+38.9% versus +21.3% -- see below for details). Therefore, an early exercise is the Covered Calls Advisor's preferred outcome, but either of these exercise outcomes would provide satisfactory returns for the Covered Calls Advisor Portfolio.

Some potential results from this transaction are:

1. If Stock Exercised Early
It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date if the INTC $.14 dividend amount is greater than the time value remaining in the call option at that time. The time value today when this position was established was $.18 [$.88-($19.70-$19.00)], so early exercise may occur if there is a moderate decline in the time value during the next week. If this does occur and the option owner decides to exercise their call options early on 11/3, then the overall performance results(including commissions) for the INTC transactions would be as follows:

Stock Purchase Cost: $13,798.95
($19.70*700+$8.95 commission)

Net Profit:
(a) Options Income: +$601.80 (700*$.88 - $14.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$498.95
= ($19.70-$19.00)*700 - $8.95 commissions

Total Net Profit: +$102.85
= (+$601.80 +$0.00 -$498.95)

Absolute Return if Exercised Early on 11/03/09 = +0.75%
= +$102.85/$13,798.95

Annualized Return if Exercised Early on 11/09/09 : +38.9%
= (+$102.85/$13,798.95)*(365/7 days)


2. If Stock Exercised at Nov09 Expiration
It is likely that the owner of the long calls will not exercise early, on the day prior to the ex-dividend date, if the $.14 dividend amount is less than the time value remaining in the call option at that time. In this case, the overall performance results(including commissions) for the INTC transactions upon Nov09 expiration would be as follows:

Stock Purchase Cost: $13,798.95
($19.70*700+$8.95 commission)

Net Profit:
(a) Options Income: +$601.80 (700*$.88 - $14.20 commissions)
(b) Dividend Income: +$98.00 ($.14 * 700 shares)
(c) Capital Appreciation: -$498.95
= ($19.70-$19.00)*700 - $8.95 commissions

Total Net Profit: +$200.85
= (+$601.80 +$98.00 -$498.95)

Absolute Return if Exercised Early on 11/03/09 = +1.5%
= +$200.85/$13,798.95

Annualized Return if Exercised Early on 11/09/09 : +21.3%
= (+$200.85/$13,798.95)*(365/25 days)

Downside Breakeven Price Point: $18.68
= $19.70 - $.88 - $.14
Downside Breakeven Protection: 5.2%
This in-the-money position provides up to 3.6% [($19.70-$19.00)/$19.70] downside protection available while still achieving the maximum potential annualized return-on-investment of +21.3% from this covered calls position.

1 comment:

  1. Very nice. I have one of those myself. I think Intel also presents an interesting long-term holding in a covered call portfolio as it has a good yield, and relatively consistent sales.

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