Wednesday, October 13, 2010

Roll Up and Out -- Research In Motion Ltd. Covered Calls

Today, with two days remaining until Oct2010 options expiration (and with the three Research In Motion Ltd.(RIMM) Oct2010 $47.50 calls well in-the-money), the Covered Calls Advisor decided to roll-up-and-out to the Nov2010 expiration at the $50.00 strike price. The transactions history as well as possible return results are detailed below:

1. Research In Motion Ltd.(RIMM) -- Continuation Transaction
With Research In Motion Ltd.(RIMM) stock priced at $50.05, the four existing Oct2010 $47.50 calls were bought back for $2.60 (only $.05 of time value remaining in each call option) and then replaced by selling three at-the-money Nov2010 $50.00 strike options at $2.44 as follows:
10/13/2010 Buy-to-Close (BTC) 3 RIMM Oct2010 $47.50 Call Options @ $2.60
10/13/2010 Sell-to-Open (STO) 3 RIMM Nov2010 $50.00 Call Options @ $2.44
The price of RIMM was $50.05 today when this roll-up-and-out debit spread transaction was made.

The transactions history is as follows:
09/23/2010 Bought 300 RIMM @ $46.55
09/23/2010 Sold 3 RIMM Oct2010 $47.50 Calls @ $1.64
10/13/2010 Buy-to-Close (BTC) 3 RIMM Oct2010 $47.50 Call Options @ $2.60
10/13/2010 Sell-to-Open (STO) 3 RIMM Nov2010 $50.00 Call Options @ $2.44

A possible overall performance result(including commissions) for these Research In Motion Ltd.(RIMM) transactions would be as follows:
Stock Purchase Cost: $13,973.95
= ($46.55*300+$8.95 commission)

Net Profit:
(a) Options Income: +$410.40
= (300*($1.64-$2.60+$2.44) - 3*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If assigned at $50.00): +$1,026.05
= ($50.00-$46.55)*300 - $8.95 commissions

Total Net Profit(If stock assigned at $50.00): +$1,436.45
= (+$410.40 +$0.00 +$1,026.05)

Absolute Return if Assigned at $50.00: +10.3%
= +$1,436.45/$13,973.95
Annualized Return If Assigned (ARIA): +64.7%
= (+$1,436.45/$13,973.95)*(365/58 days)

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