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Saturday, March 13, 2010

Hewlett-Packard Company(HPQ) -- Closed by Early Exercise

This morning, the Covered Calls Advisor was notified that the 3 short calls were exercised, so the 300 HPQ shares were sold at the Mar2010 $50.00 strike price. This covered calls position was exercised early since HPQ goes ex-dividend on Monday with a $.08 quarterly dividend, and the time value remaining in the calls was less than $.05. The time value had compressed to a minimal amount since the stock was strongly in-the-money (HPQ at $52.36 versus a strike price of $50.00) and also with only one week remaining until Mar2010 expiration. This advisor was 100% fully covered with HPQ shares (as per the term "covered calls") and was pleased to have them called away early for a nice profit, as detailed below.

The Covered Calls Advisor will determine over the weekend whether to re-purchase HPQ on Monday and to re-establish a covered calls position for Apr2010 expiration, or to switch the cash proceeds from HPQ to a new covered calls position in a different company. Whatever the decision, the associated transactions will be posted on this blog early next week on the same day the new position is established.

Hewlett-Packard Company(HPQ) -- Closed:
The transactions history for the covered calls position in Hewlett-Packard Company(HPQ) was 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.
03/12/2010 Mar2010 call options exercised early and 300 HPQ called away at $50.00

The overall performance results (including commissions) for the HPQ transactions were 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: +$0.00
(c) Capital Appreciation (Stock assigned at $50.00): +$78.05
= ($50.00-$49.71)*300 - $8.95 commissions

Total Net Profit(Stock assigned at $50.00): +$878.45
= (+$800.40 +$0.00 +$78.05)

Absolute Return (Stock assigned at $50.00): +5.9%
= +$878.45/$14,921.95
Annualized Return: +43.9%
= (+$902.45/$14,921.95)*(365/49 days)

Note: This 43.9% result is somewhat higher than the 38.7% that would have been achieved if the options had not been exercised early (and assuming the existing position would have captured the dividend next Monday and the stock would be called away next Friday upon Mar2010 expiration). So, and as is often the case, the higher annualized return-on-investment with the early exercise made it the preferable outcome.

1 comment:

  1. I think your commission on option price is too expensive. I have Thinkorswim for years. Option only cost $1.50 per contract (no add on)
    Once short option is almost worthless at 5 cents or less. You could close it out with no cost. So you have more power to sell next month contract.

    BTW:Thinkorswim is now part of TD Ameritrade but TD Ameritrade cost more $9.99+$1 per contract.

    Most of the time I do 1-2 contract
    so cost me $1.50 or $3.00 Not bad,