Friday, May 13, 2011

Early Exercise -- International Paper Company

The Covered Calls Advisor received an email notification overnight that the five call options in International Paper Company (IP) were exercised yesterday -- hence, the 500 shares owned in IP were assigned (sold) at the $31.00 strike price. The closing price of IP yesterday was $32.32 and the May2011 $31.00 call options were trading then at an ask price of $1.37, hence there was $.05[($1.37-($32.32-$31.00)] of time value remaining in the options. The options owner likely exercised their option early to purchase the stock and thus capture today's ex-dividend date payment of $.2625 per share. This early exercise is a desirable outcome for the Covered Calls Advisor since: (1) the maximum potential return was realized on this covered calls position and it was achieved seven days earlier than would have otherwise occurred; (2) this early exercise frees up cash in the Covered Calls Advisor Portfolio which opens the possibility of establishing a new covered calls position with no need to wait until the Monday after May2011 options expiration to do so; and (3) it was the Covered Calls Advisor's intention to allow the shares in IP to be called away at May2011 expiration, so the early exercise is a welcomed event.

The transactions history is as follows:
04/20/2011 Bought 500 IP @ $30.09
04/20/2011 Sold 5 IP May2011 $31.00 Calls @ $.51

The performance result (including commissions) for the covered calls position in International Paper Company (IP) is as follows:
Stock Purchase Cost: $15,053.95
= ($30.09*500+$8.95 commission)

Net Profit:
(a) Options Income: +$267.70
= (500*$.51 - $12.70 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (Stock assigned at $31.00): +$446.05
= ($31.00-$30.09)*500 - $8.95 commissions

Total Net Profit (Stock assigned at $31.00): +$713.75
= (+$267.70 +$0.00 +$446.05)

Absolute Return (Stock assigned at $31.00): +4.7%
= +$713.75/$15,053.95
Annualized Return: +75.2%
= (+$713.75/$15,053.95)*(365/23 days)

It is not often that covered calls investors are fortunate enough to benefit from an early exercise by an options owner, but the +75.2% annualized return-on-investment outcome in this instance is indicative of the exceptionally lucrative result that often occurs when this does happen.