Wednesday, March 24, 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 May2010:
03/24/2010 Bought 200 HPQ @ $52.90
03/24/2010 Sold 2 HPQ May2010 $55.00 Calls @ $.85

Note that the May2010 expiration was chosen instead of the near-month expiration of Apr2010. Normally, the Covered Calls Advisor sells the near-month expiration, but with HPQ currently priced at $52.90, the first out-of-the-money strike price is at $55.00 and its near-month (Mar2010) expiration was bid at only $.15. Since this advisor continues as "Slightly Bullish" per the "Overall Market Meter" and is even more bullish on the prospects for Hewlett-Packard's stock, selling out-of-the-money calls is preferred. So, a decision was made to extend to the May2010 expiration, thereby obtaining a more satisfactory $.85 call option premium. HPQ's next quarterly earnings release on May 17th is just prior to May2010 expiration, which is of some concern; but not sufficiently so to prevent this advisor from establishing this covered calls position.

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 (see below) total points above the threshold of 15.0 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: $10,588.95
= ($52.90*200+$8.95 commission)

Net Profit:
(a) Options Income: +$159.55
= (200*$.85 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $52.90):
-$8.95 = ($52.90-$52.90)*200 - $8.95 commissions
(c) Capital Appreciation (If exercised at $55.00): +$411.05
= ($55.00-$52.90)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $52.90): +$150.60
= (+$159.55 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $55.00): +$570.60
= (+$159.55 +$0.00 +$411.05)

Absolute Return if Unchanged at $52.90: +1.4%
= +$150.60/$10,588.95
Annualized Return If Unchanged (ARIU) +8.8%
= (+$150.60/$10,588.95)*(365/59 days)

Absolute Return if Exercised at $55.00: +5.4%
= +$570.60/$10,588.95
Annualized Return If Exercised (ARIE) +33.3%
= (+$570.60/$10,588.95)*(365/59 days)