Adjusting DIS, Roll-up and Out

A final post on the adjustments I’ve made in the portfolio positions this month, this time a roll-up and out on DIS.  I have always liked this stock since I first started investing in the early ‘80’s, so it was inevitable I would come back to it for the covered call portfolio.  It recently benefited from some good earning news, and since it passed my screen, I decided to make it one of my early holdings. 

I first bought the shares in early November and sold a Nov 2011 covered call against them that same day.  The earnings news combined with the prospect of a juicy annual dividend that is yet to be announced, but that has gone ex-dividend in early December in past years, had me revisiting the strategy almost immediately.  I decided an adjustment was in order.

Here is the analysis of the position and the resulting adjustment.

DIS

11/8/2011 Bought 200 shares at $34.55 (total $6,917)
11/8/2011 Sold 2 DIS Nov 2011 36 at $0.45 (total $80.49)
11/14/2011 Bought to close 2 DIS Nov 2011 36 at $0.61 (total $131.50)
11/8/2011 Sold to open 2 DIS Dec 37 at $0.83 (total $156.48)

Net Profit:

1) Options Income:  + $80.49 - $131.50 + $156.48 = $105.47
2) Dividend Income: If held to ex-date, based on last year’s payment, $80.00
3) Capital Appreciation if assigned at $37:  $7,382-$6,917 = $465.00

Total Net Profit if Assigned:  $465.00 + $80.00 + $105.47 = $600.47
Absolute Return on Investment: ($600.47/$6,917) = 8.68%
Annualized Return if Assigned (38 days):  8.68%*(365/38) = 83.37%
Yesterday's closing price was $36.45, so the Dec 37 is currently out of the money (OOM).

Lessons Learned:  On this trade I applied my new rule about adjustments, namely, they must be done for a credit – as shown in net profit calculation 1) above.  The second thing I am working on is how to report pending dividends in the total net profit calculation, especially since this part of the trade is most likely to stimulate an early call. In future posts, I think I may have two total net profit calculations, one for the “if assigned” assumption and one for the “if not assigned” assumption. In the case of DIS, the absolute return would be around 7.5% and the other figures would adjust accordingly if I am assigned before the stock’s ex-dividend date. If I am not assigned and collect the dividend the absolute return drops to 2.68%, and the net profit would be $185.47.