Friday, March 5, 2010

Continuation Transaction -- Sohu.com Inc.

Today, the Covered Calls Advisor Portfolio(CCAP) established a covered calls position in Sohu.com Inc.(SOHU) by selling two Apr2010 options against the 200 shares owned in SOHU as follows:

03/05/2010 Sell-to-Open (STO) 2 SOHU Apr2010 $55.00s @ $1.05

Sohu.com's price performance has been disappointing since its purchase in the CCAP last October. However, SOHU had a substantial upside price move today, so the Covered Calls Advisor's open order to sell the SOHU Apr2010 $55.00s at $1.05 was executed today when the price of SOHU was at $51.37.

Normally, the Covered Calls Advisor sells the near-month expiration. But with Sohu.com currently priced at $51.37, the first out-of-the-money strike price is at $55.00 and its near-month (Mar2010) expiration was bid at only $.20. Since this advisor continues to be bullish on Sohu.com and thus prefers to sell out-of-the-money calls, a decision was made to extend to the Apr2010 expiration and obtain a more satisfactory $1.05 call option premium.


The transactions history to date for the covered calls position in SOHU is as follows:
10/16/09 Bought 200 SOHU @ $64.05
10/16/09 Sold 2 SOHU Nov09 $65.00 Calls @ $3.50
11/21/09 Nov09 Options Expired
11/23/09 Sell-to-Open (STO) 2 SOHU Dec09 $60.00s @ $.75
Note: Price of SOHU was $55.10 when the Dec09 options were sold.
12/19/09 Dec09 Options Expired
12/28/09 Sell-to-Open (STO) 2 SOHU Jan2010 $60.00s @ $.85
Note: Price of SOHU was $57.52 when the Jan2010 options were sold.
01/16/2010 Jan2010 Options Expired
01/19/2010 Sell-to-Open (STO) 2 SOHU Feb2010 $60.00s @ $3.10
Note: Price of SOHU was $60.37 when the Feb2010 options were sold.
02/20/2010 Feb2010 Options Expired
03/03/2010 Sell-to-Open (STO) 2 SOHU Apr2010 $55.00s @ $1.05
Note: Price of SOHU was $51.37 when the Apr2010 options were sold.


Two possible overall performance results(including commissions) for the SOHU transactions would be as follows:
Stock Purchase Cost: $12,818.95
= ($64.05*200+$8.95 commission)

Net Profit:
(a) Options Income: +$1,797.75
= (200*($3.50+$.75+$.85+$3.10+$1.05) - 5*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $51.37): -$2,544.95
= ($51.37-$64.05)*200 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $55.00): -$1,818.95
= ($55.00-$64.05)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $51.37): -$747.20
= (+$1,797.75 +$0.00 -$2,544.95)
Total Net Profit(If stock exercised at $55.00): -$21.20
= (+$1,797.75 +$0.00 -$1,818.95)

Absolute Return if Stock Price Unchanged at $51.37: -5.8%
= -$747.20/$12,818.95
Annualized Return If Unchanged (ARIU): -11.6%
= (-$747.20/$12,818.95)*(365/183 days)

Absolute Return if Stock Exercised at $57.50: -0.2%
= (-$21.20/$12,818.95)
Annualized Return If Exercised (ARIE): -0.3%
= (-$21.20/$12,818.95)*(365/183 days)

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