Tuesday, June 21, 2011

Covered Calls Continuation Transactions

Upon Jun2011 options expiration, six covered calls positions in the Covered Calls Advisor Portfolio (CCAP) expired. Today, a decision was made to re-establish covered calls positions for three equities (International Paper Co., Freeport McMoRan Copper and Gold Inc., and iShares MSCI South Korea ETF) with Jul2011 expirations. The detailed transactions history for these positions as well as possible results for these investments are as follows:

1. International Paper Co.(IP) -- Continuation
The transactions history is as follows:
05/17/2011 Bought 500 IP @ $31.26
05/17/2011 Sold 5 IP Jun2011 $32.00 Calls @ $.82
06/18/2011 Jun2011 Options Expired
Note: the price of IP was $26.57 upon options expiration.
06/21/2011 Sold 5 IP Jul2011 $30.00 Calls @ $.38
Note: price of IP stock was $28.56 when these options were sold.

Two possible overall performance results(including commissions) for the International Paper Co.(IP) transactions would be as follows:
Stock Purchase Cost: $15,638.95
= ($31.26*500+$8.95 commission)

Net Profit:
(a) Options Income: +$574.60
= (500*($.82+$.38) - 2*$12.70 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $28.56 at expiration): -$1,358.95
= ($28.56-$31.26)*500 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $30.00): -$638.95
= ($30.00-$31.26)*500 - $8.95 commissions

Total Net Profit (If stock price unchanged at $28.56 at expiration): -$784.35
= (+$574.60 +$0.00 -$1,358.95)
Total Net Profit (If stock assigned at $30.00): -$64.35
= (+$574.60 +$0.00 -$638.95)

1. Absolute Return (If stock unchanged at $28.56 at expiration): -5.0%
= -$784.35/$15,638.95
Annualized Return (If stock unchanged at expiration): -30.5%
= (-$784.35/$15,638.95)*(365/60 days)

2. Absolute Return (If stock assigned at $30.00 at expiration): -0.4%
= -$64.35/$15,638.95
Annualized Return (If stock assigned at $30.00): -2.5%
= (-$64.35/$15,638.95)*(365/60 days)


2. Freeport McMoRan Copper and Gold Inc.(FCX) -- Continuation
The transactions history 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
05/27/2011 Sold 6 FCX Jun2011 $55.00 Calls @ $.44
Note: the price of FCX was $51.60 when the calls were sold.
06/18/2011 Jun2011 Options Expired
Note: the price of FCX was $47.93 upon options expiration.
06/21/2011 Sold 6 FCX Jul2011 $52.50 Calls @ $.52
Note: price of FCX stock was $49.16 when these options were sold.

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: +$4,219.85
= [300*$6.35 + 600*($1.43+$1.95+$.44+$.52) - 3*$11.20 - 4*$13.45 commissions]
(b) Dividend Income: +$450.00 [($.50 + $.25) * 600 shares]
(c) Capital Appreciation (If stock price unchanged at $49.16):
-$3,512.95 = ($49.16-$55.00)*600 - $8.95 commissions
(c) Capital Appreciation (If assigned at $52.50): -$1,508.95
= ($52.50-$55.00)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $49.16): +$1,156.90
= (+$4,219.85 +$450.00 -$3,512.95)
Total Net Profit(If stock assigned at $52.50): +$3,160.90
= (+$4,219.85 +$450.00 -$1,508.95)

Absolute Return if Unchanged at $49.16: +3.5%
= +$1,156.90/$33,008.95
Annualized Return If Unchanged (ARIU): +7.7%
= (+$1,156.90/$33,008.95)*(365/169 days)

Absolute Return if Assigned at $52.50: +9.6%
= +$3,160.90/$33,008.95
Annualized Return If Assigned (ARIA): +20.7%
= (+$3,160.90/$33,008.95)*(365/169 days)


3. iShares MSCI South Korea ETF (EWY) -- Continuation
The transactions history is as follows:
04/18/2011 Bought 600 EWY @ $64.17
04/19/2011 Sold 6 EWY May2011 $66.00 Calls @ $1.39
Note: the price of EWY was $65.20 when the calls were sold.
05/27/2011 Sold 6 EWY Jun2011 $67.00 Calls @ $.59
Note: the price of EWY was $64.84 when the calls were sold.
06/18/2011 Jun2011 Options Expired
Note: the price of EWY was $61.91 upon options expiration.
06/21/2011 Sold 6 EWY Jul2011 $65.00 Calls @ $.59
Note: price of EWY stock was $63.00 when these options were sold.

Two possible overall performance results(including commissions) for these iShares MSCI South Korea ETF (EWY) transactions would be as follows:
Stock Purchase Cost: $38,510.95
= ($64.17*600+$8.95 commission)

Net Profit:
(a) Options Income: +$1,501.65
= [600*($1.39+$.59+$.59) - 3*$13.45 commissions]
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $63.00 at expiration): -$710.95
= ($63.00-$64.17)*600 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $65.00): +$87.05
= ($65.00-$64.84)*600 - $8.95 commissions

Total Net Profit (If stock price unchanged AT $63.00 at expiration): +$790.70
= (+$1,501.65 +$0.00 -$710.95)
Total Net Profit (If stock assigned at $65.00): +$1,588.70
= (+$1,501.65 +$0.00 +$87.05)

1. Absolute Return (If stock unchanged at $63.00 at expiration): +2.1%
= +$790.70/$38,510.95
Annualized Return (If stock unchanged at expiration): +8.4%
= (+$790.70/$38,510.95)*(365/89 days)

2. Absolute Return (If stock assigned at $65.00 at expiration): +4.1%
= +$1,588.70/$38,510.95
Annualized Return (If stock assigned at $65.00): +16.9%
= (+$1,588.70/$38,510.95)*(365/89 days)

2 comments:

  1. Do the weekly options offer too little premium to sell those instead of the near month?

    ReplyDelete
  2. Anonymous,

    I just don't feel comfortable with selling weeklies yet. The primary reason for this is that I believe it is virtually impossible to forecast the direction of the market over the next week, so deciding whether to sell OTM, ATM, or ITM options for the next week seems too much like pure guesswork to me. I've been selling monthlies successfully for decades now, so that's within my comfort zone.

    Jeff

    ReplyDelete