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Friday, October 8, 2010

Roll Up and Out -- Oshkosh Corp. Covered Calls

Today, with one week remaining until Oct2010 options expiration (and with the three Oshkosh Corp.(OSK) Oct2010 $27.00 calls well in-the-money), the Covered Calls Advisor decided to roll-up-and-out to the Nov2010 expiration at the $30.00 strike price. The original covered calls position was purchased only two weeks ago, and the stock has had a very bullish move since then, including a further spike higher today in response to a Goldman Sachs upgrade from Hold to Buy and an updated target price of $34.00. The transactions history as well as a possible return result is detailed below:

1. Oshkosh Corp.(OSK) -- Continuation Transaction
Today, with Oshkosh Corp.(OSK) stock priced at $30.00, the three existing Oct2010 $27.00 calls were bought back for $3.10 and replaced by selling three at-the-money Nov2010 $30.00 strike options at $1.70 as follows:
10/08/2010 Buy-to-Close (BTC) 3 OSK Oct2010 $27.00 Call Options @ $3.10
10/08/2010 Sell-to-Open (STO) 3 OSK Nov2010 $30.00 Call Options @ $1.70
The price of OSK was $30.00 today when this roll-up-and-out debit spread transaction was made. The Covered Calls Advisor strategy is to be fully invested but to retain about 5% cash in order to accomodate roll-up transactions at opportune times that would require some additional cash to be completed (Note: this OSK debit-spread transaction is a good example of just such an occurrence).

The transactions history to date for Oshkosh Corp.(OSK) is as follows:
09/27/2010 Bought 300 OSK @ $26.46
09/27/2010 Sold 3 OSK Oct2010 $27.00 Calls @ $.80
10/08/2010 Buy-to-Close (BTC) 3 OSK Oct2010 $27.00 Call Options @ $3.10
10/08/2010 Sell-to-Open (STO) 3 OSK Nov2010 $30.00 Call Options @ $1.70

A possible overall performance result(including commissions) for the Oshkosh Corp.(OSK) transactions would be as follows:
Stock Purchase Cost: $7,946.95
= ($26.46*300+$8.95 commission)

Net Profit:
(a) Options Income: -$213.60
= (300*($.80-$3.10+$1.70) - 3*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If assigned at $30.00): +$1,053.05
= ($30.00-$26.46)*300 - $8.95 commissions

Total Net Profit(If stock price assigned at $30.00): +$839.45
= (-$213.60 +$0.00 +$1,053.05)

Absolute Return if Assigned at $30.00: +10.6%
= +$839.45/$7,946.95
Annualized Return If Assigned (ARIA): +71.4%
= (+$839.45/$7,946.95)*(365/54 days)

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