Roll Up of Morgan Stanley Covered Calls

The Covered Calls Advisor recently established Covered Calls in Morgan Stanley at the May 15th, 2020 $35.00 strike price.  The price of the 300 Morgan Stanley shares have increased from the purchase price of $37.23 to $40.10 with about 10 minutes remaining prior to today's market close.  The $.35 quarterly ex-dividend date is tomorrow and there was only $.06 [$5.16 Call options price - ($40.10 share price - $35.00 strike price)] of time value remaining in the May 15th $35.00 Call options.  With such a low ($.06 per share) time value remaining, it was likely that the Call options owner would choose to exercise their option so that the 300 shares of Morgan Stanley stock owned in the Covered Calls Advisor Portfolio would be assigned (i.e. sold) at the $35.00 strike price to the owner of the Calls.

The Covered Calls Advisor decided to roll up this Covered Calls position from the $35.00 strike to the $37.50 strike at the same May 15th, 2020 options expiration date.  At today's market close, the price of MS stock was $40.13 and the $37.50 Calls have $.41 of time value remaining, so it is very unlikely that the owner of these $37.50 Calls will exercise their option today (and immediately forgo $.41 in order to capture the $.35 ex-dividend tomorrow).  If so, the Covered Calls Advisor will capture the $.35 dividend plus potentially the $.41 per share time value now remaining in the May 15th $37.50 Calls.  This will occur if the Morgan Stanley stock price remains above $37.50 at the May 15th expiration.

A potential return-on-investment result for this Morgan Stanley Covered Calls since its inception on April 16th, 2020  is +6.8% absolute return in 30 days (equivalent to a +83.3% annualized return-on-investment).  By rolling up the original Covered Calls, this result would exceed the 5.5% absolute return (+67.2% annualized) that was the maximum potential of the original Covered Calls position at the $35.00 strike price.

The detailed transactions and a potential result are provided below.   

Morgan Stanley (MS) -- Continuation of Covered Calls Position
The transactions to-date are:
04/16/2020 Bought 300 Morgan Stanley shares @ $37.23
Note: this stock price was down 3.0% from yesterday's closing price (and the Dow was down about 200 points) this morning when this transaction executed.
04/16/2020 Sold 3 Morgan Stanley 5/15/2020 $35.00 Call options @ $3.73
Note: a simultaneous buy/write transaction was executed and the Implied Volatility of the MS 5/15/2020 $35.00 Call options that were sold was substantially higher at 58.9 than the current CBOE S&P 500 Volatility Index (VIX) at 41.7 (which continues to also be very high relative to its historic average around 16).
04/28/2020 Bought-to-Close 3 MS 5/15/2020 $35.00 Call options @ $5.16 per share
04/28/2020  Sold-to-Open 3 MS 5/15/2020 $37.50 Call options @ $3.09 per share
Note: this was a simultaneous roll up transaction
04/29/2020 Upcoming quarterly ex-dividend of $.35 per share


A possible overall performance result (including commissions) for this Morgan Stanley Covered Calls position is as follows:
Covered Calls Cost Basis: $10,052.01
= ($37.23 - $3.73) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$502.02
= ($3.73 - $5.16 + $3.09) * 300 shares + $4.02 commissions
(b) Dividend Income: +$105.00
= ($.35 dividend per share x 300 shares)

(c) Capital Appreciation (If Morgan Stanley shares assigned at $37.50 strike price at options expiration): +$81.00
+($37.50 - $37.23) * 300 shares

Total Net Profit (If Morgan Stanley shares assigned at $37.50 at May 15th, 2020 expiration): +$688.02

= (+$502.02 +$105.00 +$81.00)

Absolute Return (If Morgan Stanley shares assigned at $37.50 at May 15th, 2020 options expiration): +6.8%

= +$688.02/$10,052.01

Annualized Return (If Morgan Stanley shares assigned at $37.50 at May 15th, 2020 expiration): +83.3%

= (+$688.02/$10,052.01)*(365/30 days)