Wednesday, October 13, 2010

Roll Up and Out -- Domtar Corp. Covered Calls

Today, with two days remaining until Oct2010 options expiration (and with the four Domtar Corp.(UFS) Oct2010 $65.00 calls well in-the-money), the Covered Calls Advisor decided to roll-up-and-out to the Nov2010 expiration at the $70.00 strike price. The transactions history as well as possible return results are detailed below:

1. Domtar Corp.(UFS) -- Continuation Transaction
With Domtar Corp.(UFS) stock priced at $69.90, the four existing Oct2010 $65.00 calls were bought back for $5.00 (only $.10 of time value remaining in each call option) and then replaced by selling four at-the-money Nov2010 $70.00 strike options at $3.30 as follows:
10/13/2010 Buy-to-Close (BTC) 4 UFS Oct2010 $65.00 Call Options @ $5.00
10/13/2010 Sell-to-Open (STO) 4 UFS Nov2010 $70.00 Call Options @ $3.30
The price of UFS was $69.90 today when this roll-up-and-out debit spread transaction was made.

The transactions history 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.
09/17/2010 Sep2010 Options Expired
09/20/2010 Sell-to-Open (STO) 4 UFS Oct2010 $65.00 Call Options @ $2.10
Note: The price of UFS was $63.70 today when these options were sold.
10/13/2010 Buy-to-Close (BTC) 4 UFS Oct2010 $65.00 Call Options @ $5.00
10/13/2010 Sell-to-Open (STO) 4 UFS Nov2010 $70.00 Call Options @ $3.30

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: -$543.65
= (400*($1.10+$1.20-$5.70+$1.85+$2.10-$5.00+$3.30) - 7*$11.95 commissions)
(b) Dividend Income: +$100.00 =($.25*400) Ex-dividend was on 9/13/2010
(c) Capital Appreciation (If UFS unchanged at $69.90): +$5,911.05
= ($69.90-$55.10)*400 - $8.95 commissions
(c) Capital Appreciation (If UFS assigned at $70.00): +$5,951.05
= ($70.00-$55.10)*400 - $8.95 commissions

Total Net Profit(If UFS price unchanged at $69.90): +$5,467.40
= (-$543.65 +$100.00 +$5,911.05)
Total Net Profit(If UFS assigned at $70.00): +$5,507.40
= (-$543.65 +$100.00 +$5,951.05)

Absolute Return (If UFS unchanged at $69.90): +60.3%
= +$5,467.40/$22,048.95
Annualized Return If Unchanged (ARIU): +53.1%
= (+$5,467.40/$22,048.95)*(365/150 days)

Absolute Return (If Assigned at $70.00): +25.0%
= +$5,507.40/$22,048.95
Annualized Return If Assigned (ARIA): +60.8%
= (+$5,507.40/$22,048.95)*(365/150 days)

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