Friday, March 12, 2010

Roll Up and Out -- Gap Inc. (GPS)

Today is one week prior to expiration Friday for March 2010. A decision was made to retain Gap Inc. (GPS) in the Covered Calls Advisor Portfolio and to roll-up-and-out to the Apr2010 expiration at the $23.00 strike price. With the current Mar2010 $20.00 covered calls more than 10% in-the-money (with GPS trading at $22.76), and since the time value remaining in the options was only $.04 [$2.80-($22.76-$20.00)], a roll-up-and-out debit spread transaction was executed as follows:
03/12/2010 Buy-to-Close (BTC) 3 GPS Mar2010 $20.00s @ $2.80
03/12/2010 Sell-to-Open (STO) 3 GPS Apr2010 $23.00s @ $.55
Note: Net Debit-Spread upon Roll-Up-and-Out was $2.25 ($2.80 - $.55)

Glenn Murphy (Gap's CEO) recent presentation at the BofA/Merrill Lynch Consumer Conference reinforced this advisor's belief in Mr. Murphy's capabilities and visionary leadership. He demonstrated a detailed understanding of Gap's financials and is clearly focused on cash flow metrics. His vision for the company's brand development initiatives, plans for domestic market share gains, and international growth plans is impressive and provides continued impetus for the Covered Calls Advisor's ongoing commitment to this investment in Gap Inc.

The transactions history to date for Gap Inc. (GPS) is as follows:
02/22/2010 Bought 300 GPS @ $19.76
02/22/2010 Sold 3 GPS Mar2010 $20.00 Calls @ $.60
Roll-Up-and-Out Transaction:
03/12/2010 Buy-to-Close (BTC) 3 GPS Mar2010 $20.00s @ $2.80
03/12/2010 Sell-to-Open (STO) 3 GPS Apr2010 $23.00s @ $.55
Note: The price of GPS was $22.76 today when this debit-spread was transacted and the remaining time value in the Mar2010 options was only $.04 [$2.80-($22.76-$20.00)].
04/05/2010 Ex-Dividend = $30.00 (300 shares*$.10)

Two possible overall performance results(including commissions) for the Gap Inc. (GPS) transactions would be as follows:
Stock Purchase Cost: $5,936.95
= ($19.76*300+$8.95 commission)

Net Profit:
(a) Options Income: -$517.40
= (300*($.60-$2.80+$.55) - 2*$11.20 commissions)
(b) Dividend Income: +$30.00 =(300 shares*$.10)
(c) Capital Appreciation (If stock price unchanged at $22.76):
+$891.05 = ($22.76-$19.76)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $23.00): +$963.05
= ($23.00-$19.76)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $22.76): +$403.65
= (-$517.40 +$30.00 +$891.05)
Total Net Profit(If stock price exercised at $23.00): +$475.65
= (-$517.40 +$30.00 +$963.05)

Absolute Return if Unchanged at $22.76: +6.8%
= +$403.65/$5,936.95
Annualized Return If Unchanged (ARIU) +46.0%
= (+$403.65/$5,936.95)*(365/54 days)

Absolute Return if Exercised at $23.00: +8.0%
= +$475.65/$5,936.95
Annualized Return If Exercised (ARIE) +54.2%
= (+$475.65/$5,936.95)*(365/54 days)

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