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Thursday, August 9, 2012

Early Assignment -- Apple Inc.

Overnight, the Covered Calls Advisor received email notification from my broker that the call option in Apple Inc.(Ticker Symbol AAPL) was exercised early and therefore the 100 shares owned in Apple stock assigned (sold). This early exercise by the call options owner was done yesterday (Wednesday), which was the final trading day prior to today's ex-dividend date (with a $2.65 dividend from Apple). With AAPL well in the money ($619.86 price versus a $605.00 strike price) and with $.64 [$619.86-($605.00+15.50)] extrinsic value (aka time 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 therefore capture the dividend payment.

The transactions history was as follows:
07/30/2012 Bought 100 AAPL shares @ $595.04
07/30/2012 Sold 1 AAPL Aug2012 $585.00 Call Option @ $15.55
08/06/2012 Bought-to-Close 1 AAPL Aug2012 $585.00 Call Option @ $37.35 08/06/2012 Sold-to-Open 1 AAPL Aug2012 $605.00 Call Option @ $18.80
08/08/2012 Aug2012 $605.00 option exercised early and 100 shares of AAPL stock assigned at $605.00 per share.

The overall performance result (including commissions) for this Apple Inc.(AAPL) transaction is as follows:
Stock Purchase Cost: $59,512.95 = ($595.04*100+$8.95 commission)


Net Profit:
(a) Options Income: -$319.40
= ($15.55-$37.35+$18.80)*100 shares - 2*$9.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock assigned at $605.00): +$987.05
=($605.00-$595.04)*100 - $8.95 commissions

Total Net Profit(Stock assigned at $605.00): +$667.65
= (-$319.40 +$0.00 +$987.05)

Absolute Return: +1.1%
= +$667.65/$59,512.95
Annualized Return: +40.9%
= (+$667.65/$59,512.95)*(365/10 days)

This early exercise was an advantageous outcome for this covered calls position since the +40.9% annualized return-on-investment achieved was greater than the +30.1% that would have resulted if the option had not been exercised by the option owner, but instead if the stock would have been assigned at the monthly options expiration on Friday, August 17th.

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