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Saturday, February 11, 2012

Early Assignment -- Valero Energy Corp.

Overnight, the Covered Calls Advisor received email notification from my broker that the 4 call options in Valero Energy Corp.(Ticker Symbol VLO) were exercised early and therefore the 400 shares assigned (sold). This early exercise by the call options owner was done yesterday (Friday), which was the final trading day prior to next Monday's ex-dividend date (with a $.15 dividend from Valero).

With VLO well in the money ($24.81 price versus a $22.00 strike price) and with only about $.02 extrinsic value remaining in the option, it was expected that the options owner would exercise on the day prior to the ex-div date in order to obtain the stock shares and to then capture the dividend payment.

The transactions history was as follows:
10/25/2011 Sold 4 Valero Energy Corp.(VLO) Nov2011 $22.00 Put Options @ $1.75
Note: the price of VLO stock was $21.26 today when these puts were sold.
11/19/2011 Nov2011 VLO put options exercised -- 400 shares VLO purchased @ $22.00.
11/30/2011 Sold 4 VLO Dec2011 $23.00 Calls @ $.61
Note: the price of VLO was $22.27 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of VLO was $20.52 upon options expiration.
01/03/2012 Sold 4 VLO Feb2012 $22.00 call options @ $.84
Note: the price of VLO was $21.04 when these options were sold.
02/11/2012 4 VLO Feb2012 $22.00 Call Options Exercised Early and thus 400 shares of VLO sold at $22.00.
Note: Upon Friday's market close, the price of VLO was $24.81.

The overall performance result (including commissions) for the Valero Energy Corp.(VLO) transactions was as follows:
100% Cash-Secured Cost Basis: $8,800.00
= $22.00*400

Net Profit:
(a) Options Income: +$1,244.15
= ($1.75+$.61+$.84)*400 shares - 3*$11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (VLO stock sold at $22.00 strike price): -$8.95
= ($22.00-$22.00)*400 -$8.95 commissions

Total Net Profit: +$1,235.20
= (+$1,244.15 +$0.00 -$8.95)

Absolute Return (Stock sold at $22.00): +14.0%
= +$1,235.20/$8,800.00
Annualized Return: +47.0%
= (+$1,235.20/$8,800.00)*(365/109 days)

This position demonstrated that a large return-on-investment can be achieved from covered calls even when the stock price is unchanged. The stock was purchased at $22.00 and also subsequently sold at $22.00 but the relatively high options premiums enabled the Covered Calls Advisor to obtain a +14.0% absolute return (equivalent to a +47.0% annualized ROI) from this position.


  1. hi jeff, it is a great income generating strategy. A little question on the calculation of extrensic value. Your calculation is 0.02, whereas from the last quote for Feb Call22@2.74 from Yahoo: 22.00







    8,506 and other sources. This calculated value is 0.07. Would you clarify this 0.02. thanks and best regards for your post

  2. Hi Alex,

    For simplicity, I assume selling at the Bid price and buying at the Ask price. So, to buy back the option, I assume paying the Ask price of $2.83. So, the extrinsic value would be $.02 = [$2.83-($24.81-$22.00)].