Friday, October 16, 2009

Roll Up and Out -- Noble Corp. (NE)

Today is expiration Friday for October 2009. A decision was made to retain Noble Corp.(NE) in the Covered Calls Advisor Portfolio and to roll-out-and-up to the Nov09 expiration at the $42.00 strike price. The current Oct09 $36.00 covered calls were well in-the-money today (with NE at $41.56), and since the time value remaining in the options was only $.04 [$5.60-($41.56-$36.00)], a roll-up-and-out debit spread transaction was executed as follows:
10/16/09 Buy-to-Close (BTC) 3 NE Oct09 $36.00s @ $5.60
10/16/09 Sell-to-Open (STO) 3 NE Nov09 $42.00s @ $1.75
Note: Net Debit-Spread upon Roll-Up was $3.85 ($5.60 - $1.75)

The transactions history to date is as follows:
09/02/09 Bought 300 NE @ $33.98
09/02/09 Sold 3 NE Sep09 $34.00 Calls @ $1.30
Roll-Up-and-Out Transaction:
09/17/09 Buy-to-Close (BTC) 3 NE Sep09 $34.00s @ $5.22
09/17/09 Sell-to-Open (STO) 3 NE Oct09 $36.00s @ $3.87
Note: The price of NE was $39.19 today when this debit-spread was transacted and the remaining time value in the Sep09 option was only $.03 [$5.22-($39.19-$34.00)].
Roll-Up-and-Out Transaction:
10/16/09 Buy-to-Close (BTC) 3 NE Oct09 $36.00s @ $5.60
10/16/09 Sell-to-Open (STO) 3 NE Nov09 $42.00s @ $1.75
Note: The price of NE was $41.56 today when this transaction occurred.

The overall performance results(including commissions) for this NE covered calls position would be as follows:
Stock Purchase Cost: $10,202.95
($33.98*300+$8.95 commission)

Net Profit:
(a) Options Income: -$1,203.60
= (300*($1.30-$5.22+$3.87-$5.60+$1.75) - 3*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $41.56): +$2,265.05
= ($41.56-$33.98)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $42.00): +$2,397.05
= ($42.00-$33.98)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $41.56): +$1,061.45
= (-$1,203.60 +$0.00 +$2,265.05)
Total Net Profit(If stock price exercised at $42.00): +$1,193.45
= (-$1,203.60 +$0.00 +$2,397.05)

Absolute Return if Stock Price Unchanged at $41.56: +10.4%
= +$1,061.45/$10,202.95
Annualized Return If Unchanged (ARIU) +47.5%
= (+$1,061.45/$10,202.95)*(365/80 days)

Absolute Return if Exercised at $42.00: +11.7%
= +$1,193.45/$10,202.95
Annualized Return If Exercised (ARIE) +53.4%
= (+$1,193.45/$10,202.95)*(365/80 days)

4 comments:

  1. (c) Capital Appreciation (If stock price unchanged at $41.56): +$2,265.05
    = ($41.56-$33.98)*300 - $8.95 commissions
    (c) Capital Appreciation (If exercised at $42.00): +$2,397.05
    = ($42.00-$33.98)*300 - $8.95 commissions

    I not sure this is a very good way to express performance. Extra cash was injected into the position at two different times inflating the return. I suggest you modify the 33.98 starting position to reflect the total cost. I guess you would have to time weight the incomming cash to come up with a true cost of the position or just add in the extra cash as if it was there all along.

    ReplyDelete
  2. Anonymous,

    Your point is well taken. I've always considered my annualized returns to be a reasonably accurate (but not exact) calculation method. To be more precise would require that all investment and return events be captured on a time-weighted basis. I am aware of an internal rate of return function in Excel called XIRR(). It is more certainly more cumbersome to use since every capital inflow and outflow must be entered as well as the date on which each occurred. But I will test it using a few of my closed positions and compare the results with my current method to see if it is sufficiently accurate or if it should be changed.
    Thank you for bringing this to my attention.

    Jeff

    ReplyDelete
  3. The Annualized Return if Exercised of 53.4% shown on this blog post compares with an internal rate of return of 61.67% (see chart below). In other cases that were checked, a similar relative comparison resulted. Advantages of the current method include:
    (1) It is much less time consuming to calculate than the XIRR() method; and
    (2) It is easier for readers to understand the current calculation methodolgy; and
    (3) It normally provides a somewhat lower and therefore more cautious return on investment claim by this advisor, and I would prefer to err on the side of slightly understating the investing returns instead of overstating them. Therefore, the current method will continue to be used for this blog at this time.

    61.67% <== XIRR() Return
    Dates Cash Flow
    9/2/2009 ($10,202.95)
    9/2/2009 $378.80
    9/17/2009 ($1,571.60)
    9/17/2009 $1,155.40
    10/16/2009 ($1,685.60)
    10/16/2009 $519.40
    11/21/2009 $12,591.05

    Thanks again for raising this worthwhile topic.

    ReplyDelete
  4. I would also note that such a roll-up greatly increases your cost-averaged basis, which in cases of a sharp move to the downside can put you in quite a large hole.

    ReplyDelete