Tuesday, November 16, 2010

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

Today, with Research In Motion Ltd.(RIMM) stock priced at $56.05, the three existing Nov2010 $50.00 calls were bought back for $6.15 (only $.10 of time value remaining in each call option) and then replaced by selling three out-of-the-money Dec2010 $57.50 strike options at $3.05 as follows:
11/16/2010 Buy-to-Close (BTC) 3 RIMM Nov2010 $50.00 Call Options @ $6.15
11/16/2010 Sell-to-Open (STO) 3 RIMM Dec2010 $57.50 Call Options @ $3.05
The price of RIMM was $56.43 today when these call options were sold.

1. Research In Motion Ltd.(RIMM) -- Continuation Transaction
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
11/16/2010 Buy-to-Close (BTC) 3 RIMM Nov2010 $50.00 Call Options @ $6.15
11/16/2010 Sell-to-Open (STO) 3 RIMM Dec2010 $57.50 Call Options @ $3.05

Two possible overall performance results(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: -$542.00
= (300*($1.64-$2.60+$2.44-$6.15+$3.05) - 5*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $56.43): +$2,955.05
= ($56.43-$46.55)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $57.50): +$3,276.05
= ($57.50-$46.55)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $56.43): +$2,413.05
= (-$542.00 +$0.00 +$2,955.05)
Total Net Profit(If stock assigned at $57.50): +$2,734.05
= (-$542.00 +$0.00 +$3,276.05)

Absolute Return (If stock price unchanged at $56.43): +17.3%
= +$2,413.05/$13,973.95
Annualized Return If Unchanged (ARIU): +73.3%
= (+$2,413.05/$13,973.95)*(365/86 days)

Absolute Return if Assigned at $57.50: +19.6%
= +$2,734.05/$13,973.95
Annualized Return If Assigned (ARIA): +83.0%
= (+$2,734.05/$13,973.95)*(365/86 days)

2 comments:

  1. Jeff - nice example. Beats me why more peope don't do this ... it's like printing money monthly, and now weekly.

    Cheers
    Tim

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  2. @Tim: The RIMM example is shows a consistent failure of the covered calls approach -- the CCAdvisor would have profited more had he just been long the stock. Every month he rolled up and out he took a loss. Why is this a nice example of covered calls?

    @CCAdvisor any input on this?

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