05/28/09 Buy-to-Close (BTC) 5 NE Jun09 $27.50s @ $5.20
05/28/09 Sell-to-Open (STO) 5 NE Jun09 $32.50s @ $1.50
Net Debit-Spread upon Roll-Up was $3.70 ($5.20 - $1.50)
Note: The price of NE was $32.51 today when the debit-spread was transacted, so the remaining time-value was $.19 [$5.20-($32.51-$27.50)] when this transaction was executed.
This spreadsheet shows the current CCAP positions. The thresholds required to trigger a roll-up decision are: 1. Annualized Return if Unchanged for New Position(ARIUN) minus Annualized Return if Unchanged for Current Position(ARIUC)is > 50.0%. As shown on the spreadsheet, this metric was 56.1% for NE. The second threshold requirement for a roll-up is:
2. Payback % is > 20%. The payback % represents the net incremental option premium that will be retained if the new position is exercised upon the expiration date as a percent of the difference in the strike prices which in this instance is [($32.50-$27.50)-($5.20-$1.50)]/($32.50-$27.50) = $1.30/$5.00 = 26.0%. You'll notice that the spreadsheet shows 23.0% rather than the 26.0% actually achieved. The 23.0% represents the ask price for buying back the original $27.50 strike option and the bid price for selling the $32.50 strike option. However, more advantageous pricing closer to the bid/ask mid-points was actually achieved when the debit-spread transaction was executed.
The transactions history to date is as follows:
05/18/09 Initial Stock Purchase Transaction -- Bought 500 NE @ $29.000
05/18/09 Inital Calls Sold Transaction -- Sold 5 NE Jun09 $27.50 Calls @ $2.52
A debit-spread transaction was executed as follows:
05/28/09 Buy-to-Close (BTC) 5 NE Jun09 $27.50s @ $5.20
05/28/09 Sell-to-Open (STO) 5 NE Jun09 $32.50s @ $1.50
Note: The price of NE was $32.51 today when the debit-spread was transacted.
The overall performance results(including commissions) for the NE transactions would be as follows:
Stock Purchase Cost: $14,508.95
($29.00*500+$8.95 commission)
Net Profit:
(a) Options Income: -$615.40
= (500*($2.52-$5.20+$1.50) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised at $32.50): +$1,741.05
= ($32.50-$29.00)*500 - $8.95 commissions
Total Net Profit(If stock price exercised at $32.50): +$1,125.65
= (-$615.40 +$0.00 +$1,741.05)
Absolute Return if Exercised at $32.50: +7.8%
= +$1,125.65/$14,508.95
Annualized Return If Exercised (ARIE) +85.8%
=(+$1,125.65/$14,508.95)*(365/33 days)
It should also be noted that this potential annualized return (after the roll-up) of 85.8% is substantially higher than the 38.9% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the original $27.50 strike price upon Jun09 expiration.
