Wednesday, April 20, 2011

Freeport-McMoRan Copper and Gold Inc.(FCX) -- Continuation Transaction

Last Friday was options expiration Friday for April 2011. The short options in the Freeport-McMoRan Copper and Gold Inc.(FCX) Apr2011 covered calls position with a $55.00 strike price expired worthless since FCX closed last Friday at $51.17, below the $55.00 strike price. Today the Covered Calls Advisor decided to retain the 600 shares in FCX and to establish a covered calls position by selling 6 May2011 $55.00 calls. FCX reported their first quarter earnings this morning and as expected by this advisor, they beat analysts' earnings estimates by a wide margin ($1.59 versus $1.26). In addition to the regular quarterly dividend of $.250 per share, the company also announced a supplementary dividend of $.50 for shareholders of record on May 15th, which is prior to the May2011 options expiration date; so this dividend is included in the potential returns shown below. The call options were sold soon after the market opened this morning when the stock price spiked up to $54.73. The detailed transactions history for this position as well as two possible results for this investment are as follows:

1. Freeport-McMoRan Copper and Gold Inc.(FCX) -- Continuation Transaction
The transactions history to date for Freeport-McMoRan Copper and Gold Inc.(FCX) is as follows:
01/28/2011 Sold 3 Freeport-McMoRan Copper and Gold Inc.(FCX) Feb2011 $110.00 Puts @ $6.35
Note: the price of FCX stock was $106.10 when these puts were sold.
The 100% cash-secured put position in Freeport McMoRan (FCX) ended out-of-the-money and was assigned for purchase. The stock underwent a 2-for-1 split since original sale of the three FCX puts at $110.00 strike price. So the assignment was for the purchase of 600 shares of FCX stock at half of the the original $110 strike price value which is $55.00.
03/17/2011 Sold 6 FCX Apr2011 $55.00 Calls @ $1.43
Note: The price of FCX was $52.15 when these call options were sold.
04/16/2011 Apr2011 FCX Options Expired.
Note: the price of FCX was $51.17 upon options expiration.
04/20/2011 Sold 6 FCX May2011 $55.00 Calls @ $1.95
Note: the price of FCX was $54.73 when these call options were sold.
05/11/2011 $150.00 Ex-Dividend ($.250 per share * 600 shares)
05/15/2011 Supplementary Dividend ($.50 per share) for shares of record on 5/15/2011.
05/21/2011 May2011 Options Expiration Date

Two possible overall performance results(including commissions) for the Freeport-McMoRan Copper and Gold Inc.(FCX) transactions would be as follows:
Stock Purchase Cost: $33,008.95
= ($110.00*300+$8.95 commission)

Net Profit:
(a) Options Income: +$3,738.00
= [300*$6.35 + 600*($1.43+$1.95) - 3*$11.20 - 2*6*$13.45 commissions]
(b) Dividend Income: +$450.00 [($.50 + $.25) * 600 shares]
(c) Capital Appreciation (If stock price unchanged at $54.73):
-$170.95 = ($54.73-$55.00)*600 - $8.95 commissions
(c) Capital Appreciation (If assigned at $55.00): -$8.95
= ($55.00-$55.00)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $54.73): +$4,017.05
= (+$3,738.00 +$450.00 -$170.95)
Total Net Profit(If stock assigned at $55.00): +$4,179.05
= (+$3,738.00 +$450.00 -$8.95)

Absolute Return if Unchanged at $54.73: +12.2%
= +$4,017.05/$33,008.95
Annualized Return If Unchanged (ARIU): +39.3%
= (+$4,017.05/$33,008.95)*(365/113 days)

Absolute Return if Assigned at $55.00: +12.7%
= +$4,179.05/$33,008.95
Annualized Return If Assigned (ARIA): +40.9%
= (+$4,179.05/$33,008.95)*(365/113 days)

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