Thursday, July 14, 2011

Roll Up and Out -- Microsoft Corp.(MSFT)

Tomorrow is July 2011 options expiration Friday. With Microsoft (MSFT) trading at $26.49, the seven MSFT Jul2011 $26.00 calls were in-the-money. The Covered Calls Advisor decided to retain the Microsoft position and roll-up-and-out to the Aug2011 expiration at the $27.00 strike price. The seven Jul2011 $26.00 calls were bought back for $.50 (only $.01 of time value remaining in each call option) and replaced by selling seven out-of-the-money Aug2011 $27.00 strike options at $.56 as follows:
07/14/2011 Buy-to-Close (BTC) 7 MSFT Jul2011 $26.00 Call Options @ $.50
07/14/2011 Sell-to-Open (STO) 7 MSFT Aug2011 $27.00 Call Options @ $.56

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

1. Microsoft Corp.(MSFT) -- Continuation Transaction
The transactions history to date for Microsoft Corp.(MSFT) is as follows:
01/24/2011 Bought 700 MSFT @ $28.15
02/17/2011 Ex-Dividend Date $112.00 = $.16 per share x 700 shares
01/24/2011 Sell-to-Open(STO) 7 MSFT Feb2011 $29.00 CallS @ $.40
02/19/2011 Feb 2011 Options Expired
03/21/2011 Sell-to-Open(STO) 7 MSFT Apr2011 $26.00 Calls @ $.31
Note: the price of MSFT was $25.47 today when the options were sold.
04/16/2011 Apr2011 MSFT options expired.
04/26/2011 Sold 7 MSFT May2011 $26.00 Calls @ $.66
Note: The price of MSFT was $26.06 when these call options were sold.
05/17/2011 Ex-Dividend Date $112.00 = $.16 per share x 700 shares
05/31/2011 Sold 7 MSFT Jul2011 $26.00 Calls @ $.29
Note: The price of MSFT was $25.05 when these call options were sold.
07/14/2011 Buy-to-Close (BTC) 7 MSFT Jul2011 $26.00 Call Options @ $.50
07/14/2011 Sell-to-Open (STO) 7 MSFT Aug2011 $27.00 Call Options @ $.56
Note: The price of MSFT was $26.52 when these call options were sold.
08/17/2011 Ex-Dividend Date $112.00 = $.16 per share x 700 shares

Two possible overall performance results(including commissions) for the Microsoft Corp.(MSFT) transactions would be as follows:
Stock Purchase Cost: $19,713.95
= ($28.15*700+$8.95 commission)

Net Profit:
(a) Options Income: +$1,133.00
= 700*($.40+$.31+$.66+$.29-$.50+$.56) - 5*$14.20 commissions)
(b) Dividend Income: +$336.00 ($.16/share * 700 shares * 3 payments)
(c) Capital Appreciation (If stock price unchanged at $26.52): -$1,149.95
= ($26.52-$28.15)*700 - $8.95 commissions
(c) Capital Appreciation (If assigned at $26.00): -$813.95
= ($27.00-$28.15)*700 - $8.95 commissions

Total Net Profit(If stock price unchanged at $26.52): +$319.05
= (+$1,133.00 +$336.00 -$1,149.95)
Total Net Profit(If stock assigned at $27.00): +$655.05
= (+$1,133.00 +$336.00 -$813.95)

Absolute Return if Stock Unchanged at $26.52: +1.6%
= +$319.05/$19,713.95
Annualized Return If Unchanged (ARIU): +2.8%
= (+$319.05/$19,713.95)*(365/208 days)

Absolute Return if Assigned at $27.00: +3.3%
= +$655.05/$19,713.95
Annualized Return If Assigned (ARIA): +5.8%
= (+$655.05/$19,713.95)*(365/208 days)

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