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Friday, March 18, 2011

Roll Up and Out -- Petrobras (PBR)

Today is March 2011 options expiration Friday. With Petrobras (PBR) trading at $39.18, the three PBR Mar2011 $37.00 calls were in-the-money. The Covered Calls Advisor decided to retain the Petrobras position and roll-up-and-out to the Apr2011 expiration at the $40.00 strike price. The three Mar2011 $37.00 calls were bought back for $2.19 (only $.01 of time value remaining in each call option) and replaced by selling three out-of-the-money Apr2011 $40.00 strike options at $1.01 as follows:
03/18/2011 Buy-to-Close (BTC) 3 PBR Mar2011 $37.00 Call Options @ $2.19
03/18/2011 Sell-to-Open (STO) 3 PBR Apr2011 $40.00 Call Options @ $1.01

The overall transactions history as well as two possible return-on-investment results are detailed below:

1. Petrobras (PBR) -- Continuation Transaction
The transactions history to date for Petrobras (PBR) is as follows:
06/21/2010 Bought 300 PBR @ $39.34
06/21/2010 Sold 3 PBR Jul2010 $40.00 Calls @ $1.05
7/17/2010 Jul2010 Options Expired
Note: The closing price of PBR was $34.51 on expiration Friday.
07/22/2010 Sold 3 PBR Aug2010 $38.00 Calls @ $.55
Note: The price of PBR was $36.52 today when these options were sold.
08/02/2010 +$57.90 Ex-Dividend = ($.193 Net Dividend x 300 shares)
08/21/2010 Aug2010 Options Expired
Note: The closing price of PBR was $34.42 on expiration Friday.
09/01/2010 Sold 3 PBR Sept2010 $36.00 Call Options @ $.58
Note: The price of PBR was $35.20 today when these call options were sold.
09/17/2010 Sep2010 Options Expired
09/20/2010 Sell-to-Open (STO) 3 PBR Oct2010 $37.00 Call Options @ $.63
Note: The price of PBR was $35.24 today when these options were sold.
10/16/2010 Oct2010 Options Expired
Note: Price of PBR at expiration was $34.29
10/18/2010 Sell-to-Open (STO) 3 PBR Nov2010 $36.00 Call Options @ $.62
Note: The price of PBR was $34.20 today when these call options were sold.
11/03/2010 +$57.90 Ex-Dividend = ($.193 Net Dividend x 300 shares)
11/20/2010 Nov2010 Options Expired
Note: Price of PBR at expiration was $33.59
12/01/2010 Sell-to-Open (STO) 3 PBR Dec2010 $34.00 Call Options @ $.54
Note: The price of PBR was $33.05 today when these call options were sold.
12/07/2010 $41.42 Dividend = ($.138 Net Dividend x 300 shares)
12/18/2010 Dec2010 Options Expired
Note: The price of PBR was $34.08 upon Dec2010 options expiration.
12/21/2010 Sold 3 PBR Jan2011 $35.00 Calls @ $.59
Note: The price of PBR was $34.18 when these options were sold.
01/06/2011 $61.03 Dividend = ($.203 Net Dividend x 300 shares)
01/21/2011 Buy-to-Close (BTC) 3 PBR Jan2011 $35.00 Call Options @ $1.35
01/21/2011 Sell-to-Open (STO) 3 PBR Feb2011 $37.00 Call Options @ $.89
02/18/2011 Buy-to-Close (BTC) 3 PBR Feb2011 $37.00 Call Options @ $.85
02/18/2011 Sell-to-Open (STO) 3 PBR Mar2011 $37.00 Call Options @ $1.67
03/18/2011 Buy-to-Close (BTC) 3 PBR Mar2011 $37.00 Call Options @ $2.19
03/18/2011 Sell-to-Open (STO) 3 PBR Apr2011 $40.00 Call Options @ $1.01
Note: The price of PBR was $39.23 when these options were sold.

Two possible overall performance results (including commissions) for the Petrobras (PBR) transactions would be as follows:
Stock Purchase Cost: $11,810.95
= ($39.34*300+$8.95 commission)

Net Profit:
(a) Options Income: +$998.80
= (300*($1.05+$.55+$.58+$.63+$.62+$.54+$.590-$1.35+$.89-$.85+$1.67-$2.19+$1.01) - 11*$11.20 commissions)
(b) Dividend Income: +$186.60 (2*$.193 + $.236)*300 shares -- Three ex-Dividend dates
(c) Capital Appreciation (If PBR price unchanged at $39.23): -$41.95
= ($39.23-$39.34)*300 - $8.95 commissions
(c) Capital Appreciation (If PBR assigned at $40.00): +189.05
= ($40.00-$39.34)*300 - $8.95 commissions

Total Net Profit(If PBR unchanged at $39.23): +$1,143.45
= (+$998.80 +$186.60 -$41.95)
Total Net Profit(If PBR assigned at $40.00): +$1,374.45
= (+$998.80 +$186.60 +$189.05)

Absolute Return (If Unchanged at $39.23): +9.7%
= +$1,143.45/$11,810.95
Annualized Return If Unchanged (ARIU): +11.8%
= (+$1,143.45/$11,810.95)*(365/299 days)

Absolute Return (If Assigned at $40.00): +11.6%
= +$1,374.45/$11,810.95)
Annualized Return If Assigned(ARIA): +14.2%
= (+$1,374.45/$11,810.95)*(365/299 days)

This covered calls history demonstrates that as a result of receiving monthly options income, covered calls can achieve a net profit even when the underlying equity declines somewhat from the original purchase price.

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