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Thursday, January 21, 2010

Continuation Transaction -- Aspen Insurance Holdings Inc.

Today, the Covered Calls Advisor Portfolio(CCAP) established a covered calls position in Aspen Insurance Holdings Inc.(AHL) by selling three Mar2010 options against the 300 shares owned in Aspen Insurance Holdings Inc. as follows:

01/21/2010 Sell-to-Open (STO) 3 AHL Mar2010 $30.00s @ $.35

The transactions history to date is as follows:
10/20/09 Bought 300 AHL @ $28.20
10/20/09 Sold 3 AHL Nov09 $30.00 Calls @ $.35
11/06/09 Ex-Dividend $45.00 = $.15*300 shares
11/21/09 Nov09 Options Expired
01/21/2010 Sell-to-Open (STO) 3 AHL Mar2010 $30.00s @ $.35
Note: The price of AHL was $27.78 when this call option sale was transacted
02/10/2010 Ex-Dividend $45.00 = $.15*300 shares

Some potential profit profiles for the continuation covered calls position in AHL are as follows:
Stock Purchase Cost: $8,468.95
= ($28.20*300+$8.95 commission)

Net Profit:
(a) Options Income: +$187.60
= (300*($.35+$.35) - 2*$11.20 commissions)
(b) Dividend Income: +$90.00 = 2*$.15*300 shares
(c) Capital Appreciation(If stock price unchanged at $27.78): -$134.95
= ($27.78-$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 $27.78): +$61.65
= (+$187.60 +$90.00 -$134.95)
Total Net Profit(If stock exercised at $30.00): +$808.65
= (+$187.60 +$90.00 +$531.05)

Absolute Return if Stock Price Unchanged at $27.78: +0.7%
= +$61.65/$8,468.95
Annualized Return If Unchanged (ARIU): +1.8%
= (+$61.65/$8,468.95)*(365/151 days)

Absolute Return if Stock Exercised at $30.00: +9.5%
= +$808.65/$8,468.95
Annualized Return If Exercised (ARIE): +23.1%
= (+$808.65/$8,468.95)*(365/151 days)

2 comments:

  1. So, why AHL? The technical pattern suggests a breakout--but the topping tail on strong volume casts doubt on a bullish short term outlook.

    Also, the short call doesn't add enough downside protection (only 1.3%) which is pretty bad.

    Looks like you're hoping to get called out but that really looks like a stretch.

    And earnings are announced prior to expiration.

    So, I guess I'm wondering why don't ditch this stock and look for something that will give you more premium, more downside protection and less risk due to earnings on the horizon?

    ReplyDelete
  2. Anonymous,

    Your points are well made and well taken, but I am comfortable with my AHL holding.

    AHL is a highly value-oriented selection since it is priced at only about 80% of book value. This hurricane season (now past) was especially mild and as a result, AHL's next earnings report is likely to be very good. I think this factor is now underappreciated by analysts. Also, their recently announced stock buyback program shows that their management agrees that their stock is underpriced at its current level. So I'm willing to accept a lower than normal downside protection in order to capture more of the upside move that I am expecting with this stock.

    Thanks again for your comments and questions.

    Jeff

    ReplyDelete