The Covered Calls Advisor Portfolio (CCAP) covered call position in McKesson Corporation(MCK) was rolled up today (11/28/08) from the Dec08 $30s to the Dec08 $35s. The spread transaction was executed as follows:
11/28/08 Buy-to-Close (BTC) 3 MCK Nov08 $30s @ $5.28
11/28/08 Sell-to-Open (STO) 3 MCK Nov08 $35s @ $1.63
Net Debit on Roll Up $3.65 ($5.28-$1.63)
The ‘net debit to strike price difference ratio’ was 73% [($5.28-$1.63)/($35-$30)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. In addition, I like the MCK holding and would like to retain the stock for continuing to write future covered calls against the McKesson stock upon the Dec08 expiration.
A summary of the MCK transactions so far is as follows:
11/24/08 Initial Stock Purchase -- Bought 300 MCK @ $30.72
11/24/08 Initial Call Option Transaction -- Sold 3 MCK Dec08 $30.00 Calls @ $2.35
11/26/08 $36.00 Ex-Dividend Income ($.12 per share X 300 shares)
11/28/08 Roll Up Transaction -- BTC 3 MCK Dec 30s @ $5.28
11/28/08 Roll Up Transaction -- STO 3 MCK Dec 35s @ $1.63
Note: MCK was trading at $34.88 today when the roll up transaction was executed.
The overall performance results(including commissions) for the MCK transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $9,224.95
($30.72*300+$8.95 commission)
Net Profit:
(a) Options Income: -$423.60 (300*($2.35-$5.28+$1.63) - 3*$11.20 commissions)
(b) Dividend Income: +$36.00 (300*$.12/share)
(c) Capital Appreciation (If exercised): +$1,266.10
= ($35.00-$30.72)*300 - 2*$8.95 commissions
Total Net Profit(If stock price exercised at $35.00): +$878.50
= (-$423.60 +$36.00 +$1,266.10)
Annualized Return If Exercised (ARIE) +133.7%
(+$878.50/$9,224.95)*(365/26 days)
The tradeoff in this roll-up transaction is that:
- it increases the potential annualized return of the position from 79.9% originally to 133.7% now.
- it decrease the downside breakeven protection from 8.0% initially to 3.8% now
As stated above, since it is this advisor's current inclination to want to retain the stock upon Dec08expiration in order to then establish a Jan09 covered calls position on MCK, today's roll-up spread was transacted.
