Monday, July 18, 2011

Establish Freeport McMoRan Copper and Gold, Inc. Covered Calls

The prior covered calls position in Freeport McMoRan Copper and Gold Inc.(FCX) with a Jul2011 expiration closed in-the-money upon options expiration last Friday and was therefore assigned. Today, the Covered Calls Advisor decided to re-establish a new covered calls position in Freeport McMoRan Copper and Gold with a one-week July 22, 2011 expiration as follows:

1. Freeport McMoRan Copper and Gold Inc.(FCX)
The transactions were as follows:
07/18/2011 Bought 200 FCX @ $54.95
07/18/2011 Sold 2 FCX Jul 22, 2011 $52.50 Calls @ $2.88
Note: The price of FCX was $54.98 when the options were sold.

FCX remains a value-oriented stock selection in the materials (primarily copper but also gold) sector. The Weekly options were selected because of the relatively high implied volatility in the options and thus the attractive option premiums they offer for a very short (4 trading days) time period. But it is possible that copper could experience a short-term price pull-back which might cause an accompanying decline in the price of FCX. So, because of this short duration, a more conservative in-the-money strike price of $52.50 was selected with the stock being purchased at $54.95 (as shown above).

A possible overall performance result(including commissions) for this FCX covered calls position would be as follows:
Stock Purchase Cost: $10,998.95
= ($54.95*200+$8.95 commission)

Net Profit:
(a) Options Income: +$565.55
= (200*$2.88 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If assigned at $52.50): -498.95
= ($52.50-$54.95)*200 - $8.95 commissions

Total Net Profit(If FCX assigned at $52.50): +$66.60
= (+$565.55 +$0.00 -$498.95)

Absolute Return if Assigned at $52.50: +0.6%
= +$66.60/$10,998.95
Annualized Return If Assigned (ARIA) +55.3%
= (+$66.60/$10,998.95)*(365/4 days)