Monday, January 25, 2010

Establish Hewlett-Packard Company Covered Calls

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Hewlett-Packard Company (HPQ) covered calls as follows:

Established Hewlett-Packard Company(HPQ) Covered Calls for Feb2010:
01/22/2010 Bought 300 HPQ @ $49.71
01/25/2010 Sold 3 HPQ Feb2010 $50.00 Calls @ $1.62
Note: The price of HPQ was $50.19 today when the call options were sold.

The stock purchase was transacted late Friday afternoon. At that time a day-trade order to sell 3 call options at $1.52 was placed, but with the market's continued decline into the close the order did not execute. Fortunately, with the market's bullish opening this morning, I was able to sell the options for $1.62.

Hewlett-Packard is a leading worldwide provider of personal computers, printers, and servers. With their 2008 acquisition of EDS they are now also a leading provider of information technology services. Their 2009 acquisition of 3Com is also viewed as a strategically savvy acquisition related to their network services offerings. The company has demonstrated continual improvement in its operating performance under the excellent leadership of CEO, Mark Hurd. Despite 2009's impressive stock performance, HPQ's financials and fundamental financial metrics remain attractive. With both stock advisory services used by the Covered Calls Advisor (Schwab Equity Ratings and currently rating HPQ as a "Buy", and with this advisor's "Buy Alerts" spreadsheet total points above the threshold of 20.0 total points, it was decided to add HPQ to the CCAP at this time.

Some possible overall performance results(including commissions) for the HPQ transactions would be as follows:
Stock Purchase Cost: $14,921.95
= ($49.71*300+$8.95 commission)

Net Profit:
(a) Options Income: +$474.80
= (300*$1.62 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $49.71):
-$8.95 = ($49.71-$49.71)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$78.05
= ($50.00-$49.71)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $49.71): +$465.85
= (+$474.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $50.00): +$552.85
= (+$474.80 +$0.00 +$78.05)

Absolute Return if Unchanged at $49.71: +3.1%
= +$465.85/$14,921.95
Annualized Return If Unchanged (ARIU) +39.3%
= (+$465.85/$14,921.95)*(365/29 days)

Absolute Return if Exercised at $50.00: +3.7%
= +$552.85/$14,921.95
Annualized Return If Exercised (ARIE) +46.6%
= (+$552.85/$14,921.95)*(365/29 days)