Monday, July 30, 2012

Established Apple Inc. Covered Call

The previous covered call in Apple Inc. was assigned upon Jul2012 options expiration. Today, a new covered call position was established in Apple Inc. with an Aug2012 expiration and at the $585 strike price. The transactions are as follows:

07/30/2012 Bought 100 AAPL shares @ $595.04
07/30/2012 Sold 1 AAPL Aug2012 $585.00 Call Option @ $15.55
08/09/2012 Ex-dividend of $2.65 per share

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $2.65 with an ex-dividend date of Aug 9th. If the current time value (i.e. extrinsic value) remaining in the short call option decays to less than $2.65 by Aug 8th, then there is some possibility that the call options owner will exercise early and will call the stock away to capture the dividend. As shown below, two potential returns for this position are:

+25.7% annualized return if the stock is assigned at Aug2012 expiration
+32.6% annualized return if the stock is assigned early

Either outcome is attractive but the Covered Calls Advisor has a slight preference that the options owner is enticed to exercise early -- which would result in a somewhat higher annualized return-on-investment for this position.  Two possible overall performance results (including commissions) for this Apple Inc.(AAPL) covered call position are as follows:
Stock Purchase Cost: $59,512.95
= ($595.04*100+$8.95 commission)

Net Profit:
(a) Options Income: +$1,545.30
= ($15.55*100 shares) - $9.70 commissions
(b) Dividend Income (If stock assigned at Feb2012 expiration):  +$265.00
= ($2.65 dividend per share x 100 shares); or
(b) Dividend Income (If option exercised early on day prior to Aug 9th ex-div date): +$0.00
(c) Capital Appreciation (If stock assigned at $585.00): -$1,012.95
+($585.00-$595.04)*100 - $8.95 commissions

Total Net Profit(If stock assigned at $585.00 at Aug2012 expiration): +$797.35
= (+$1,545.30 +$265.00 -$1,012.95); or
Total Net Profit(If option exercised on day prior to Aug 9th ex-div date): +$532.35
= (+$1,545.30 +$0.00 -$1,012.95)

1. Absolute Return (If stock assigned at $585.00 at Aug2012 expiration): +1.3% = +$797.35/$59,512.95
Annualized Return (If stock assigned): +25.7%
= (+$797.35/$59,512.95)*(365/19 days);

OR

2. Absolute Return (If option exercised on day prior to Aug 9th ex-div date): +0.9%
= +$532.35/$59,512.95
Annualized Return (If option exercised early): +32.6%
= (+$532.35/$59,512.95)*(365/10 days)

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