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Monday, December 13, 2010

Roll Up and Out -- International Paper Co.(IP) Covered Calls

Today is the beginning of options expiration week for Dec2010. With the three International Paper Co.(IP) Dec2010 $26.00 calls well in-the-money, the Covered Calls Advisor decided to roll-up-and-out to the Jan2011 expiration at the $27.00 strike price. The transactions history as well as a potential return-on-investment result are detailed below:

1. International Paper Co.(IP) -- Continuation Transaction
With International Paper Co.(IP) trading at $26.84, the three existing Dec2010 $26.00 calls were bought back for $.97 ($.13 of time value remaining in each call option) and subsequently replaced by selling three Jan2011 $27.00 strike options at $1.15 as follows:
12/13/2010 Buy-to-Close (BTC) 3 IP Dec2010 $26.00 Call Options @ $.97
12/13/2010 Sell-to-Open (STO) 3 IP Jan2011 $27.00 Call Options @ $1.15
The price of IP was $27.04 today when these call options were sold.

The transactions history to date for International Paper Co.(IP) is as follows:
11/09/2010 Bought 300 IP @ $25.82
11/09/2010 Sold 3 IP Nov2010 $25.00 Calls @ $1.05
11/19/2010 Ex-Dividend $38.25 = $.1275*300 shares
11/20/2010 Nov2010 Options Expired
Note: The closing price of IP was $24.80 on expiration Friday.
11/24/2010 Sold 3 IP Dec2010 $26.00 Calls @ $.53
Note: The price of IP was $25.40 when the call options were sold.
12/13/2010 Buy-to-Close (BTC) 3 IP Dec2010 $26.00 Call Options @ $.97
12/13/2010 Sell-to-Open (STO) 3 IP Jan2011 $27.00 Call Options @ $1.15
Note: The price of IP was $27.04 when the call options were sold.

A possible overall performance result(including commissions) for the IP transactions would be as follows:
Stock Purchase Cost: $7,754.95
= ($25.82*300+$8.95 commission)

Net Profit:
(a) Options Income: +$483.20
= (300*($1.05+$.53-$.97+$1.15) - 4*$11.20 commissions)
(b) Dividend Income): +$38.25 = ($.1275 * 300 shares) Note: Ex-Div was on 11/19/2010
(c) Capital Appreciation (If stock assigned at $27.00): +$345.05
= ($27.00-$25.82)*300 - $8.95 commissions

Total Net Profit (If stock assigned at $27.00 at Jan2011 expiration): +$866.50
= (+$483.20 +$38.25 +$345.05)

Absolute Return (If stock assigned at $27.00 at Jan2011 expiration): +11.2%
= +$866.50/$7,754.95
Annualized Return If Assigned (ARIA): +55.1%
= (+$866.50/$7,754.95)*(365/74 days)

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