The Covered Calls Advisor Portfolio (CCAP) covered call position in Potash Corp of Saskatchewan Inc(POT) was rolled-up today (01/02/09) from the Jan09 $65s to the Jan09 $75s.
The spread transaction was executed as follows:
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
Net Debit on Roll Up $7.00 ($11.35-$4.35)
The ‘net debit to strike price difference ratio’ was 70% [($11.35-$4.35)/($75-$65)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. The decision to roll-up POT was a difficult one -- Potash is a volatile stock and the dramatic increase in the value of the stock in only the past few days could easily be matched by an equally dramatic move the other way in a short time period. Ultimately, it was decided that this risk was worth it considering the substantial additional time value in the remaining option premium that is achieved by transacting the roll-up.
A summary of the POT transactions so far is as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 200 POT @ $65.84
12/22/08 Inital Calls Sold Transaction -- Sold 2 POT Jan09 $65.00 Calls @ $5.90
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
The overall performance results(including commissions) for the POT transactions through the Jan09 expiration would be as follows:
Stock Purchase Cost: $13,176.95 ($65.84*200+$8.95 commission)
Net Profit:
(a) Options Income: -$188.65 (200*($5.90-$11.35+$4.35) - 3*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$1,982.10 = ($75.00-$65.00)*200 - 2*$8.95 commissions
Total Net Profit(If stock price exercised at $75.00): +$1,793.45
= (-$188.65 +$0.00 +$1,982.10)
Absolute Return If Exercised = +13.6%
+$1,793.45/$13,176.95
Annualized Return If Exercised (ARIE) +191.1%
(+$1,793.45/$13,176.95)*(365/26 days)
