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Friday, October 15, 2010

Roll Up and Out -- Microsoft Corporation Covered Calls

Today is Oct2010 options expiration. With the five Microsoft Corporation (MSFT) Oct2010 $25.00 calls in-the-money, the Covered Calls Advisor decided to roll-up-and-out to the Nov2010 expiration at the $26.00 strike price. The transactions history as well as possible return results are detailed below:

1. Microsoft Corporation (MSFT) -- Continuation Transaction
With Microsoft Corporation (MSFT) trading at $25.29, the five existing Oct2010 $25.00 calls were bought back for $.32 (only $.03 of time value remaining in each call option) and then replaced by selling five Nov2010 $26.00 strike options at $.47 as follows:
10/15/2010 Buy-to-Close (BTC) 5 MSFT Oct2010 $25.00 Call Options @ $.32
10/15/2010 Sell-to-Open (STO) 5 MSFT Nov2010 $26.00 Call Options @ $.47
The price of MSFT was $25.29 today when this roll-up-and-out credit spread transaction was executed.

The transactions history to date for Microsoft Corporation (MSFT) is as follows:
07/23/2010 Bought 500 MSFT @ $25.47
07/23/2010 Sold 5 MSFT Aug2010 $26.00 Calls @ $.44
08/17/2010 Ex-Dividend $65.00 = $.13 * 500 shares
08/21/2010 Aug2010 Option Expired
Note: The closing price of MSFT was $24.23 on expiration Friday.
09/03/2010 Sold 5 MSFT Oct2010 $25.00 Call Options @ $.49
Note: The price of MSFT was $24.31 today when these options were sold.
10/15/2010 Buy-to-Close (BTC) 5 MSFT Oct2010 $25.00 Call Options @ $.32
10/15/2010 Sell-to-Open (STO) 5 MSFT Nov2010 $26.00 Call Options @ $.47

Two possible overall performance results(including commissions) for the Microsoft Corp.(MSFT) transactions would be as follows:
Stock Purchase Cost: $12,743.95
= ($25.47*500+$8.95 commission)

Net Profit:
(a) Options Income: +$489.20
= (500*($.44+$.49-$.32+$.47) - 4*$12.70 commissions)
(b) Dividend Income: +$65.00 =($.13 * 500 shares)
(c) Capital Appreciation (If stock price unchanged at $25.29):
-$98.95 = ($25.29-$25.47)*500 - $8.95 commissions
(c) Capital Appreciation (If assigned at $26.00): +$256.05
= ($26.00-$25.47)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $25.29): +455.25
= (+$489.20 +$65.00 -$98.95)
Total Net Profit(If stock assigned at $26.00): +$810.25
= (+$489.20 +$65.00 +$256.05)

Absolute Return if Unchanged at $25.29: +2.0%
= +$455.25/$12,743.95
Annualized Return If Unchanged (ARIU): +6.2%
= (+$455.25/$12,743.95)*(365/120 days)

Absolute Return if Assigned at $25.00: +6.4%
= +$810.25/$12,743.95
Annualized Return If Assigned (ARIA): +19.3%
= (+$810.25/$12,743.95)*(365/120 days)

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