Thursday, October 29, 2009

Paychex Inc (PAYX) -- Closed by Early Exercise

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Paychex Inc (PAYX) was closed out today (10/29/09) when the short call options were assigned early which resulted in the stock position being sold at the $27.50 strike price.

The transactions history for this covered calls position was as follows:
10/13/09 Bought 500 PAYX @ $28.38
10/13/09 Sold 5 PAYX Nov09 $27.50 Calls @ $1.28
10/29/09 Positions Closed by Early Exercise (Options exercised and stock sold at $27.50)

This is the Covered Calls Advisor's first use of a covered calls "ex-dividend early exercise strategy". The Covered Calls Advisor originally entered this position with the full knowledge that early exercise was a likely occurrence since PAYX goes ex-dividend today and it was in the call options owner's economic interest to exercise early to obtain the stock and thus capture the dividend. This is true since the $.31 dividend payment exceeds the very minimal [approximately $.01=($27.50-($29.04-$1.55))] time value remaining in the call option. As described when this covered calls position was originally established (link), this outcome was the one preferred by this advisor since it results in a larger annualized return-on-investment than would occur if the original position was held until expiration.

The overall performance result(including commissions) for the PAYX transactions was as follows:
Stock Purchase Cost: $14,198.95
($28.38*500+$8.95 commission)

Net Profit:
(a) Options Income: +$627.30 [500*$1.28 - ($8.95 + 5*$.75)] commissions)
Note: the commissions shown is upon selling the options initially. There are no additional options commissions upon assignment.
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$448.95
= ($27.50-$28.38)*500 - $8.95 commissions

Total Net Profit: +$178.35
= (+$627.30 +$0.00 -$448.95)

Absolute Return = +1.3%
= +$178.35/$14,198.95

Annualized Return: +28.7%
= (+$178.35/$14,198.95)*(365/16 days)

With early exercise, this PAYX covered calls position is now completely closed and an absolute return-on-investment of +1.3% so far during this Nov09 expiration month has been obtained. Now, the $13,741.05 cash received from selling the 500 shares of PAYX is available for re-use and will be applied today to establish another covered calls position with another Nov09 expiration. The net effect is that we will be using the same investment capital twice in one expiration month, which will provide an opportunity for a possible profit double-dip. That is, a second Nov09 covered calls position will provide an opportunity to increase the +1.3% absolute return already achieved so far this month from the closed PAYX position. A separate post will be made on this blog later today after the new position has been established.