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Friday, June 18, 2010

Early Exercise -- Hewlett-Packard Company

The Covered Calls Advisor received an email notification overnight that the two call options in Hewlett-Packard Company (HPQ) were exercised yesterday -- hence, the 200 shares owned in HPQ were called away (sold) at the $46.00 strike price. This early exercise is a desirable outcome since: (1) the maximum potential return was realized on this covered calls position and it was achieved one day earlier than would have otherwise occurred; (2) this early exercise frees up cash in the Covered Calls Advisor Portfolio which opens the possibility of establishing a new covered calls position for July2010 today (Friday) and with no need to wait until next Monday (i.e. after assignment that would likely occur this weekend as a result of June2010 expiration today); and (3) it was the Covered Calls Advisor's intention to allow the shares in HPQ to be called away today anyway (upon June2010 expiration), so the early exercise is a welcomed event.

The transactions history is as follows:
03/24/2010 Bought 200 HPQ @ $52.90
03/24/2010 Sold 2 HPQ May2010 $55.00 Calls @ $.85
05/22/2010 May2010 Options Expired
Note: The closing price of HPQ was $46.58 on expiration Friday
6/01/2010 Sold 2 HPQ Jun2010 $46.00s @ $1.20
Note: The price of HPQ was approximately $45.84 when these options were sold.

The performance results (including commissions) for the covered calls position in Hewlett-Packard Company (HPQ) were as follows:
Stock Purchase Cost: $10,588.95
= ($52.90*200+$8.95 commission)

Net Profit:
(a) Options Income: +$389.10
= (200*($.85+$1.20) - 2*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $45.84):
-$1,420.95 = ($45.84-$52.90)*200 - $8.95 commissions
(c) Capital Appreciation (If exercised at $46.00): -$1,388.95
= ($46.00-$52.90)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $45.84): -$1,031.85
= (+$389.10 +$0.00 -$1,420.95)
Total Net Profit(If stock price exercised at $46.00): -$999.85
= (+$389.10 +$0.00-$1,388.95)

Absolute Return if Unchanged at $45.84: -9.7%
= -$1,031.85/$10,588.95
Annualized Return If Unchanged (ARIU) -40.9%
= (-$1,031.85/$10,588.95)*(365/87 days)

Absolute Return if Exercised at $46.00: -9.4%
= -$999.85/$10,588.95
Annualized Return If Exercised (ARIE) -39.6%
= (-$999.85/$10,588.95)*(365/87 days)

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