Monday, March 29, 2010

Establish International Paper Co. Covered Calls

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of International Paper Co.(IP) covered calls as follows:

Established International Paper Co.(IP) Covered Calls for Apr2010:
03/26/2010 Bought 300 IP @ $25.07
03/29/2010 Sold 3 IP Apr2010 $26.00 Calls @ $.45

International Paper Company operates as a paper and packaging company with operations in North America, Europe, Latin America, the Russian Federation, Asia, and north Africa. Its Printing Papers segment produces uncoated printing and writing papers, including uncoated papers, market pulp, and uncoated bristols. The company's Industrial Packaging segment manufactures containerboards. Its products include linerboard, medium, whitetop, recycled linerboard, recycled medium, and saturated kraft. Its Consumer Packaging segment produces coated paperboard for various packaging and commercial printing end uses. The company's Distribution segment provides services and products to various customer markets, supplying commercial printers with printing papers and graphic pre-press, printing presses, and post-press equipment; the building services and away-from-home markets with facility supplies; and manufacturers with packaging supplies and equipment, as well as offers warehousing and delivery services. Its Forest Products segment owns and manages forest lands primarily in the United States.

Credit Suisse recently issued a very bullish analysis of containerboard stocks in which they highlighted the following catalysts: (1) containerboard pricing is poised to increase as the overall economy improves since the industry is already operating at 95% of capacity while current inventories are at 15-year lows; and (2) analysts' current average earnings estimates are low in comparison to likely results for the next several quarters. The predicted pricing strength is now even more apparent since IP has recently announced an increase to a record level of $640/ton for containerboard which will go into effect beginning April 1st.

For the Covered Calls Advisor's "Buy Alerts" spreadsheet (shown below), IP achieved a total points rating of 16.03, which exceeds the desired minimum threshold of 15.0 for investment:

Note: For expanded view, left click on the spreadsheet above.

Two possible overall performance results(including commissions) for the International Paper transactions would be as follows:
Stock Purchase Cost: $7,529.95
= ($25.07*300+$8.95 commission)

Net Profit:
(a) Options Income: +$126.05
= (300*$.45 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $25.07):
-$8.95 = ($25.07-$25.07)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $26.00): +$270.05
= ($26.00-$25.07)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $25.07): +$117.10
= (+$126.05 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $26.00): +$396.10
= (+$126.05 +$0.00 +$270.05)

Absolute Return if Unchanged at $25.07: +1.6%
= +$117.10/$7,529.95
Annualized Return If Unchanged (ARIU) +25.8%
= (+$117.10/$7,529.95)*(365/22 days)

Absolute Return if Exercised at $26.00: +5.3%
= +$396.10/$7,529.95
Annualized Return If Exercised (ARIE) +87.3%
= (+$396.10/$7,529.95)*(365/22 days)