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Thursday, October 8, 2015

Early Exercise of Potash Corp of Saskatchewan Inc Covered Calls

Today before market open, I received both an email and a phone call notification from my broker that the covered calls position in Potash Corp of Saskatchewan Inc. (Ticker Symbol POT) with an Oct2015 expiration and at the $20.00 strike price was exercised early. The POT shares had risen from $20.31 when purchased to $22.16 at yesterday's market close and the time value remaining in the call option had declined to less than $.05; so the owner of the Call options exercised his/her option to buy the shares at the $20.00 strike price in order to capture Thursday's (today's) quarterly ex-dividend payment of $.38 per share.

The actual return-on-investment result for this closed position was +1.6% absolute return (equivalent to +72.4% annualized return for the 8 day holding period).

The transactions associated with this Potash Corp of Saskatchewan Inc position were as follows:

09/30/2015 Bought 200 POT shares @ $20.31
09/30/2015 Sold 2 POT Oct2015 $20.00 Call options @ $.73
10/07/2015 Two POT Call options exercised and 200 shares sold a $20.00 strike price
Note: the market closing price of POT stock yesterday was $22.16

The performance result (including commissions) for this Potash Corp covered calls position are as follows:
Stock Purchase Cost: $4,070.95
= ($20.31*200+$8.95 commission)

Net Profit:
(a) Options Income: +$135.55
= ($.73*200 shares) - $10.45 commissions
(b) Dividend Income (Call options exercised early on business day prior to Oct 8th ex-div date): +$0.00
(c) Capital Appreciation [Potash Corp stock assigned early on Oct 7th (business day prior to Oct 8th ex-div date)]: -$70.95
+($20.00-$20.31)*200 - $8.95 commissions

Total Net Profit: +$64.60
= (+$135.55 +$0.00 -$70.95); or

Absolute Return (two Call options exercised on day prior to ex-div date): +1.6%
= +$64.60/$4,070.95
Annualized Return: +72.4%
= (+$64.60/$4,070.95)*(365/8 days)