Monday, November 22, 2010

Establish Domtar Corp.(UFS) Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Domtar Corp.(UFS) covered calls as follows:
Established Domtar Corp.(UFS) Covered Calls for Dec2010:
11/22/2010 Bought 300 UFS @ $78.20
11/22/2010 Sold 3 UFS Dec2010 $80.00 Calls @ $2.35

A prior covered calls position in Domtar has been maintained monthly since Jul2010 options expiration. With the stock price in-the-money at Nov2010 expiration last Friday, the stock was assigned (called away) then. This was a very successful investment over the 5 month period as it achieved an annualized return-on-investment of 60.8%.

Domtar Corporation was formed on August 16, 2006, for the purpose of combining the fine paper assets of Weyerhaeuser with those of Domtar Inc. The company is now the largest integrated manufacturer of uncoated freesheet paper in North America and the second largest in the world with about global 34% market share. The company also makes papergrade, fluff and specialty pulp, lumber and wood products, and manages forestland. Approximately 81% of the company's revenues were generated from the sale of pulp and paper, 15% came from paper distribution, and 4% was from the sale of lumber and wood products. In uncoated freesheet, Domtar has 10 pulp and paper mills in operation (eight in the U.S. and two in Canada) with annual production capacity of
3.9 million tons of uncoated freesheet, 1.9 million tons of market pulp and 238,000 tons of coated groundwood.

Two possible overall performance results(including commissions) for the UFS transactions would be as follows:
Stock Purchase Cost: $23,468.95
= ($78.20*300+$8.95 commission)

Net Profit:
(a) Options Income: +$693.80
= (300*$2.35 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UFS unchanged at $78.20): $-8.95
= ($78.20-$78.20)*300 - $8.95 commissions
(c) Capital Appreciation (If UFS assigned at $80.00): +$531.05
= ($80.00-$78.20)*300 - $8.95 commissions

Total Net Profit(If UFS price unchanged at $78.20): +$684.85
= (+$693.80 +$0.00 -$8.95)
Total Net Profit(If UFS assigned at $80.00): +$1,224.85
= (+$693.80 +$0.00 +$531.05)

Absolute Return (If UFS unchanged at $78.20): +2.9%
= +$684.85/$23,468.95
Annualized Return If Unchanged (ARIU): +41.0%
= (+$684.85/$23,468.95)*(365/26 days)

Absolute Return if Stock Assigned at $80.00: +5.2%
= +$1,224.85/$23,468.95
Annualized Return If Assigned (ARIA): +73.3%
= (+$1,224.85/$23,468.95)*(365/26 days)