Thursday, December 2, 2010

Bank of America (BAC) -- Continuation Transaction

Today, a decision was made to retain the 400 shares of Bank of America (BAC) and to establish a Jan2011 covered calls position. To say the least, Bank of America stock performance has been very disappointing since it was purchased in June, but the Covered Calls Advisor maintains his conviction that over the next year, BAC will increase above its book value to a price above the $16.04 original purchase price.
BAC currently trades at about one-half of its historic price/book value ratio. Additionally, Bank of America stock price catalysts in 2011 should include: an improving U.S. outlook, stronger loan growth, continuing declines in credit losses, and a gradually steeper yield curve.

The transactions history for BAC as well as some possible results for this investment is as follows:

1. Bank of America (BAC) -- Continuation
The transactions history to date for Bank of America Corp.(BAC) is as follows:
06/21/2010 Bought 400 BAC @ $16.04
06/21/2010 Sold 4 BAC Jul2010 $16.00 Calls @ $.58
07/17/2010 Jul2010 Options Expired
Note: The closing price of BAC was $13.98 on expiration Friday.
07/22/2010 Sold 4 BAC Aug2010 $14.00 Calls @ $.50
Note: The price of BAC was $13.87 today when this option was sold.
08/21/2010 Aug2010 Option Expired
Note: The closing price of BAC was $12.86 on expiration Friday.
09/01/2010 Ex-Dividend $4.00 = $.01*400 shares
09/03/2010 Sold 4 BAC Oct2010 $14.00 Call Options @ $.38
Note: The price of BAC was $13.41 today when these options were sold.
10/16/2010 Oct2010 options expired.
Note: The closing price of BAC was $11.98 on expiration Friday.
11/04/2010 Sold 4 BAC Nov2010 $12.00 Call Options @ $.26
Note: The price of BAC was $11.84 today when these options were sold.
11/20/2010 Nov2010 Options Expired
Note: The closing price of BAC was $11.65 on expiration Friday.
12/01/2010 Ex-Dividend $4.00 = $.01*400 shares
12/02/2010 Sell-to-Open (STO) 4 BAC Jan2011 $12.50 Call Options @ $.34
Note: The price of BAC was $11.59 and the implied volatility was about 39 today when these options were sold. The Jan2011 expiration was selected instead on the usual near-month (Dec2010 in this case) expiration since the option premium of $.17 was below the minimum of $.25 per contract required by the Covered Calls Advisor.

Two possible overall performance results(including commissions) for the Bank of America Corp.(BAC) transactions would be as follows:
Stock Purchase Cost: $6,424.95
= ($16.04*400+$8.95 commission)

Net Profit:
(a) Options Income: +$776.20
= (400*($.58+$.50+$.38+$.26+$.34) - 5*$11.95 commissions)
(b) Dividend Income: +$8.00 = 2x($.01*400 shares)
(c) Capital Appreciation (If stock price unchanged at $11.59): -$1,788.95
= ($11.59-$16.04)*400 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $12.50): -$1,424.95
= ($12.50-$16.04)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $11.59): -$1,004.75
= (+$776.20 +$8.00 -$1,788.95)
Total Net Profit(If stock assigned at $12.50): -$640.75
= (+$776.20 +$8.00 -$1,424.95)

Absolute Return (If Stock unchanged at $11.59): -15.6%
= -$1,004.75/$6,424.95
Annualized Return If Unchanged (ARIU): -26.5%
= (-$1,004.75/$6,424.95)*(365/215 days)

Absolute Return if Assigned at $12.50: -10.0%
= -$640.75/$6,424.95
Annualized Return If Assigned (ARIA): -16.9%
= (-$980.75/$6,424.95)*(365/215 days)

1 comment:

  1. BAC are you kidding? Stop bottom fishing :)

    No I'm totally kidding. I sold a put on BAC and did okay, but I do feel it gives good plays in both directions, but I'm not sure about it being a long term holding.

    I'm originally from VA (richmond) so it's nice to have found your blog. SOme of my readers were asking about covered calls so I will send them your way.

    Good luck with the trade!

    ReplyDelete