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Monday, August 6, 2012

Roll-Ups -- Apple Inc. and Valero Energy Corp.

1. Apple Inc.(AAPL)
Today, with 12 days remaining until Aug2012 options expiration and with Apple Inc. trading at $622.01, the Aug2012 $585.00 options were well in-the-money. There was only $.34 [$622.01-($585.00+$37.35)] time value remaining in the $585.00 options, so a decision was made to roll-up the covered calls position to the Aug2012 $605.00 strike price. These options were sold at $18.80 which increases the options income prior to this month's expiration while simultaneously increasing the likelihood of retaining the Apple shares and capturing the $2.65 dividend on the Aug 9th ex-dividend date.

The transaction history so far in this Apple Inc.(AAPL) position is 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
08/09/2012 Ex-dividend of $2.65 per share

A possible result from this position 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 (If stock assigned at Feb2012 expiration): +$265.00
= ($2.65 dividend per share x 100 shares)
(c) Capital Appreciation (If stock assigned at $605.00): +$987.05
=($605.00-$595.04)*100 - $8.95 commissions

Total Net Profit(If stock assigned at $605.00 at Aug2012 expiration): +$932.65
= (-$319.40 +$265.00 +$987.05)

Absolute Return (If stock assigned at $605.00 at Aug2012 expiration): +1.6%
= +$932.65/$59,512.95
Annualized Return (If stock assigned): +30.1%
= (+$932.65/$59,512.95)*(365/19 days)

This roll-up transaction increases the maximum annualized return-on-investment from +25.7% prior to the roll-up to +30.1% now (if AAPL is above $605.00 upon market close on the Aug 17th options expiration date).


2. Valero Energy Corp.(VLO)
This past Friday, with 15 days remaining until Aug2012 options expiration and with Valero trading at $28.00, the Aug2012 $24.00 options were well in-the-money. There was no time value remaining in the $24.00 options, so a decision was made to roll-up the covered calls position to the Aug2012 $28.00 strike price. These options were sold at $.70 which increases the options income prior to this month's expiration while simultaneously increasing the likelihood of retaining the Valero shares and capturing the $.175 dividend on the Aug 13th ex-dividend date.

The transaction history so far in this Valero (VLO) position is as follows:
06/21/2012 Bought 300 VLO @ $22.82 06/21/2012
Sold 3 VLO Jul2012 $24.00 Calls @ $.46
07/17/2012 Bought-to-Close 3 VLO Jul2012 $24.00 Calls @ $1.50
07/17/2012 Sold-to-Open 3 VLO Aug2012 $24.00 Calls @ $1.95
08/03/2012 Bought-to-Close 3 VLO Aug2012 $24.00 Calls @ $4.00
08/03/2012 Sold-to-Open 3 VLO Aug2012 $28.00 Calls @ $.70
08/13/2012 Ex-dividend date at $.175 per share

A possible result from this position is as follows:
Stock Purchase Cost: $6,854.95 = ($22.82*300+$8.95 commission)

Net Profit:
(a) Options Income: -$761.80
= ($.46-$1.50+$1.95-$4.00+$.70)*300 shares) - 4*$11.20 commissions
(b) Dividend Income: $52.50 = $.175 * 300 shares
(c) Capital Appreciation (If stock price above $28.00 at Aug2012 options expiration): +$1,545.05
=($28.00-$22.82)*300 - $8.95 commissions

Total Net Profit(If stock price above $28.00 at Aug2012 options expiration): +$835.75 = (-$761.80 +$52.50 +$1,545.05)

Absolute Return (If Valero stock price above $28.00 at Aug2012 options expiration): +12.2% = +$835.75/$6,854.95
Annualized Return (If stock price above $28.00 at expiration): +76.7%
= (+$835.75/$6,854.95)*(365/58 days)

This roll-up transaction increases the maximum annualized return-on-investment from +53.9% prior to the roll-up to +76.7% now (if VLO is above $28.00 upon market close on the Aug 17th options expiration date).

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