Saturday, February 4, 2012

Early Assignment -- Xilinx, Inc.

Overnight, the Covered Calls Advisor received email notification from my broker that the 3 call options in Xilinx, Inc.(Ticker Symbol XLNX) were exercised early and therefore the 300 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 $.19 dividend from Xilinx).

As explained in this post (See "Establish Xilinx Inc. Covered Calls"), when this covered calls position was established 10 calendar days ago, the Covered Calls Advisor was hoping for this early exercise outcome since it provides the highest possible annualized return-on-investment result for this investment. As detailed below, this early exercise resulted in a +20.0% annualized ROI, slightly better than the +18.2% that would have been achieved if the early exercise had not occurred early, but instead if the stock remained above the $34.00 strike price and would therefore be assigned two weeks from now on the February 17th options expiration date. In short, it is better to earn a $.30 profit per share in 12 days (average of $.0250/day) than a $.49 profit ($.30 options premium plus $.19 dividend income) in 26 days (average of $.0188/day).

Often (as is true in this instance), when the extrinsic value (i.e. time value) remaining in the call options is less than the dividend amount, the options owner is enticed to exercise on the day prior to the ex-div date in order to obtain the stock shares and to capture the dividend payment. In this instance the Xilinx dividend payment is $.19 per share, which is greater than the current $.06 extrinsic value [$2.98 current Asked Price - ($36.92 current stock price minus $34.00 strike price)]. In essence, the options owner was enticed to exercise early. Fortunately for the Covered Calls Advisor, the early exercise immediately closes out the covered calls position and the full remaining $.06 extrinsic value is immediately captured as profit. This profit along with the cash from the sale of the 300 shares of Xilinx will be available as early as market opening on Monday morning for establishing any new covered calls investment in the Covered Calls Advisor Portfolio.

The transactions history was as follows:
01/25/2012 Bought 300 XLNX @ $35.30
01/25/2012 Sold 3 XLNX Feb2012 $34.00 Calls @ $1.60
02/04/2012 3 XLNX Feb2012 $34.00 Call Options Exercised Early and thus 300 shares of XLNX sold at $34.00.
Note: Upon Friday's market close, the price of XLNX was $36.92 and the associated Ask price of the call options was $2.98.

The overall performance result (including commissions) for the Xilinx, Inc.(XLNX) transactions was as follows:
Stock Purchase Cost: $10,598.95
= ($35.30*300+$8.95 commission)

Net Profit:
(a) Options Income: +$468.80
= ($1.60*300 shares) - $11.20 commissions
(b) Dividend Income: $0.00 Note: Call options exercised on day prior to Feb 6th ex-div date.
(c) Capital Appreciation (Stock assigned at $34.00): -$398.95
+($34.00-$35.30)*300 - $8.95 commissions

Total Net Profit: +$69.85
= (+$468.80 +$0.00 -$398.95)

Absolute Return (Options assigned early -- on day prior to Feb 6th ex-div date):
+0.7% = +$69.85/$10,598.95
Annualized Return: +20.0%
= (+$69.85/$10,598.95)*(365/12 days)