Friday, February 19, 2010

Continuation Transaction -- Hewlett-Packard Company

Today is the options expiration date for Feb2010. The Covered Calls Advisor decided to retain Hewlett-Packard in the Covered Calls Advisor Portfolio(CCAP) so the covered calls position was rolled out from the Feb2010 $50s to the Mar2010 $50s. For a growth company with the quality and excellent management of HPQ, the value proposition remains intact with its current Price/Sales ratio at only 1.0 and a surprisingly low Price/Earnings ratio of 11.5 (based on projected earnings per share this year of around $4.40).

The covered calls roll-out transactions today were as follows:
02/19/2010 Buy-to-Close(BTC) 3 HPQ Feb2010 $50.00s @ $.46
02/19/2010 Sell-to-Open(STO) 3 HPQ Mar2010 $50.00s @ $1.62

The transactions history to date is as follows:
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 when these call options were sold.
02/19/2010 Buy-to-Close(BTC) 3 HPQ Feb2010 $50.00s @ $.46
Note: The price of HPQ was $50.41 when these call options were closed out.
02/19/2010 Sell-to-Open(STO) 3 HPQ Mar2010 $50.00s @ $1.62
Note: The price of HPQ was $50.58 when these call options were sold.
03/15/2010 Ex-Dividend $24.00 = $.08*300 shares
03/20/2010 Mar2010 expiration date

The potential profit for the covered calls positions in HPQ are as follows:
Stock Purchase Cost: $14,921.95
= ($49.71*300+$8.95 commission)

Net Profit:
(a) Options Income: +$800.40
= [300*($1.62-$.46+$1.62) - 3*$11.20 commissions]
(b) Dividend Income: +$24.00 = $.08*300 shares
(c) Capital Appreciation (If stock exercised at $50.00): +$78.05 = ($50.00-$49.71)*300 - $8.95 commissions

Total Net Profit(If stock exercised at $50.00): +$902.45
= (+$800.40 +$24.00 +$78.05)

Absolute Return if Stock Exercised at $50.00: +6.0%
= +$902.45/$14,921.95
Annualized Return If Exercised (ARIE): +38.7%
= (+$902.45/$14,921.95)*(365/57 days)

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