Friday, August 13, 2010

Roll Up and Out -- Domtar Corp.

Today, with one week remaining until Aug2010 options expiration (and with the four Domtar Corp.(UFS) Aug2010 $55.00 calls well in-the-money), the Covered Calls Advisor decided to roll-up-and-out to the Sep2010 expiration at the $65.00 strike price. The transactions history as well as some possible results are detailed below:

1. Domtar Corp.(UFS) -- Continuation Transaction
Today, with Domtar Corp.(UFS) stock priced at $60.29 the existing Aug2010 $55.00 covered calls were bought back for $5.70. Later today, when the stock had risen to $61.38, the limit order to sell four Sep2010 $65.00 strike options at $1.85 was executed as follows:
08/13/2010 Buy-to-Close (BTC) 4 UFS Aug2010 $55.00 Call Options @ $5.70
08/12/2010 Sell-to-Open (STO) 4 UFS Sep2010 $65.00 Call Options @ $1.85

The transactions history to date for Domtar Corp.(UFS) is as follows:
06/23/2010 Bought 400 UFS @ $55.10
06/23/2010 Sold 4 UFS Jul2010 $60.00 Calls @ $1.10
07/17/2010 Jul2010 Options Expired
Note: The closing price of UFS was $47.77 on expiration Friday.
07/22/2010 Sold 4 UFS Aug2010 $55.00 Calls @ $1.20
Note: The price of UFS was $50.80 today when these options were sold.
08/13/2010 Buy-to-Close (BTC) 4 UFS Aug2010 $55.00 Call Options @ $5.70
08/12/2010 Sell-to-Open (STO) 4 UFS Sep2010 $65.00 Call Options @ $1.85
Note: The price of UFS was $61.38 today when these options were sold.

Two possible overall performance results(including commissions) for Domtar Corp.(UFS) transactions would be as follows:
Stock Purchase Cost: $22,048.95
= ($55.10*400+$8.95 commission)

Net Profit:
(a) Options Income: -$667.80
= (400*($1.10+$1.20-$5.70+$1.85) - 4*$11.95 commissions)
(b) Dividend Income: +$100.00 =($.25*400) with ex-dividend of 9/13/2010
(c) Capital Appreciation (If UFS unchanged at $61.38): +$2,503.05
= ($61.38-$55.10)*400 - $8.95 commissions
(c) Capital Appreciation (If UFS assigned at $65.00): +$3,951.05
= ($65.00-$55.10)*400 - $8.95 commissions

Total Net Profit(If UFS price unchanged at $61.38): +$1,935.25
= (-$667.80 +$100.00 +$2,503.05)
Total Net Profit(If UFS assigned at $65.00): +$3,383.25
= (-$667.80 +$100.00 +$3,951.05)

Absolute Return (If UFS unchanged at $61.38): +8.8%
= +$1,935.25/$22,048.95
Annualized Return If Unchanged (ARIU): +36.8%
= (+$1,935.25/$22,048.95)*(365/87 days)

Absolute Return if Exercised at $55.00: +15.3%
= +$3,383.25/$22,048.95
Annualized Return If Exercised (ARIE): +64.4%
= (+$3,383.25/$22,048.95)*(365/87 days)

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