Friday, August 26, 2011

Establish Alcoa Inc. Covered Calls

A new covered calls position was established yesterday in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Alcoa Inc.(AA) covered calls as follows:

Established Alcoa Inc.(AA) Covered Calls for Sep2011:
08/26/2011 Bought 500 AA @ $11.49
08/26/2011 Sold 5 AA Sep2011 $12.00 Calls @ $.42
Note: the price of AA was $11.60 when the call options were sold.

Two possible overall performance results(including commissions) for the Alcoa transactions are as follows:
Stock Purchase Cost: $5,753.95
= ($11.49*500+$8.95 commission)

Net Profit:
(a) Options Income: +$197.30
= ($.42*500 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $11.49): -$8.95
= ($11.49-$11.49)*500 - $8.95 commissions
(c) Capital Appreciation (If AA above $12.00 at Sep2011 expiration): +$246.05
+($12.00-$11.49)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $11.49): +$188.35
= (+$197.30 +$0.00 -$8.95)
Total Net Profit(If stock price above $12.00 at Sep2011 options expiration): +$443.35= (+$197.30 +$0.00 +$246.05)

1. Absolute Return if Unchanged at $11.49: +3.3%
= +$188.35/$5,753.95
Annualized Return If Unchanged (ARIU): +54.3%
= (+$188.35/$5,753.95)*(365/22 days)

2. Absolute Return (If stock price above $12.00 at Sep2011 options expiration): +7.7%
= +$443.35/$5,753.95
Annualized Return (If stock price above $12.00 at expiration): +127.8%
= (+$443.35/$5,753.95)*(365/22 days)

The downside breakeven price at expiration is at $11.07 ($11.49 - $.42).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Sep2011 options expiration) for this Alcoa covered calls position is 63.8%. This compares with a probability of profit of 52.3% for a buy-and-hold of Alcoa over the same time period.

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