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Thursday, February 1, 2018

Roll Up and Out Covered Calls in Blackstone Group LP

Yesterday, a new Covered Calls position was established in Blackstone Group L.P. (ticker BX) for the February 16th, 2018 options expiration at the $35.00 strike price when the stock was at $36.24.  Today, they reported both earnings and revenues that exceeded analysts' expectations.  In addition, they declared a quarterly distribution of $.85 that goes ex-distribution in one week (on February 8th).  Fortunately, this was substantially higher than expected since the distribution was $.47 in the same quarter last year.

When the stock was at $37.13 today and the time value remaining in the Feb2018 $35.00 Calls was only $.06, this Advisor decided to roll-up-and-out to the March 16th, 2018 $36.00 strike price.  The net debit for this transaction was $.70 per share -- $1.49 credit for selling-to-open the March $36 Calls and $2.19 debit for buying-to-close the February $35 Calls.  Based on the Covered Calls Advisor's current Neutral sentiment, an in-the-money position was established.

As detailed below, two potential return-on-investment results are (1) a +1.5% absolute return in 9 days (equivalent to a +62.3% annualized return-on-investment) if assigned early on the day prior to the Feb 8th ex-distribution date; or (2) a +4.0% absolute return in 45 days (equivalent to a +32.3% annualized return-on-investment) if assigned at expiration.

Blackstone Group L.P. (BX) -- Roll Up and Out Covered Calls Position
The implied volatility of the Call options was 28.5 and the open interest was 7,570 contracts today when this roll-up-and-out transaction was made. 

The transactions to-date are as follows:
01/31/2018 Bought 500 shares of Blackstone Group stock @ $36.24 per share 
01/31/2018 Sold 5 BX February 16th, 2018 $35.00 Call options @ $1.50 per share
Note: this was a simultaneous Buy/Write transaction
02/01/2018 Rolled-Up-and-Out to the March 16th, 2018 $36.00 strike price at at net debit of $.70 ($2.19 - $1.49) per share
02/08/2018 Upcoming ex-distribution of $.85 per share

Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $17,378.30
= ($36.24 - $1.50)* 500 shares + $8.30 commissions

Net Profit Components:
(a) Options Income: +$391.70
= ($1.50 - $.70) * 500 shares -$8.30 commissions
(b) Distribution Income (If BX assigned early on day prior to Feb 8th ex-distribution date) : +$0.00; OR
(b) Distribution Income (If BX assigned on March 16th options expiration date):  $425.00
= $.85 per share * 500 shares 
(c) Capital Appreciation (If BX stock is assigned early on day prior to Feb 8th ex-distribution date):  -$124.95
= ($36.00 - $36.24) * 500 shares -$4.95 commission; OR
(c) Capital Appreciation (If BX stock is in-the-money, so assigned on March 16th expiration date): -$124.95
= ($36.00 - $36.24) * 500 shares -$4.95 commission

1. Total Net Profit (If BX assigned early on day prior to Feb 8th ex-distribution date) : +$266.75
= (+$391.70 options income +$0.00 distribution income -$124.95 capital appreciation); OR
2. Total Net Profit (If BX assigned at March 16th options expiration date):  +$691.75
= (+391.70 options income + $425.00 distribution income - $124.95 capital appreciation)

1. Absolute Return (If BX assigned early): +1.5%
= +$266.75/$17,378.30
Equivalent Annualized Return: +62.3%
= (+$266.75/$17,378.30)*(365/9 days); OR
2. Absolute Return (If BX assigned at March 16th options expiration): +4.0%
= +$691.75/$17,378.30
Equivalent Annualized Return: +32.3%
= (+$691.75/$17,378.30)*(365/45 days)

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