Adjusting IP: Rolling Up and Out

Early in the development of this covered call approach, I chose IP as one of my stocks.  As I’ve done additional research to map out my process and stock selection scheme, this stock is one that doesn’t meet all the criteria.  But I like it, and a lot of the colleagues I have been following trade IP options; and I have to admit it has been a stock that has given me a lot of experience already in the short time I have been working with this strategy.

Coincidentally, I noticed yesterday on one of the blogs I follow that a colleague has worked on a similar trade with this stock – an adjustment to the strike price of the call and to the contract month.  There is a link to his post at the end of this one.

With IP approaching ex-dividend date (yesterday), I began to think of whether I might make an adjustment to my holding of 200 shares and the covered call I had sold on them.  I had two Nov 2011 26 contracts, and soon after I bought the shares the contracts had gone in the money (ITM).  So I have been keeping an eye on the position for a while, in light of the pending dividend ($28.75 per lot) – remembering that my COP was called away last month on the ex-date.

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

10/13/2011 Bought 200 shares at $25.29 (total $5,064.48)
10/13/2011 Sold 2 IP Nov 2011 26 at $1.03 (total $196.48)
11/8/2011 Bought to close 2 IP Nov 2011 26 at $2.67 (total $543.50)
11/8/2011 Sold to open 2 IP Dec 29 at $1.00 (total $190.48)

Net Profit:

1) Options Income:  + $196.48 - $543.50 + $190.48 = -$156.54
2) Dividend Income: Held to ex-date, $57.50
3) Capital Appreciation if assigned at $29.00:  $5,782-$5,065 = $717.00
Total Net Profit:  $717 + $57.50 - $156.54 = $617.96
Absolute Return on Investment: ($617.96/$5,065) = 12.20%
Annualized Return if Assigned (14 days):  12.20%*(365/64) = 69.58%
Yesterday's closing price was $28.15, so the Dec 29 is currently out of the money (OOM).

Lessons Learned: There are a couple of takeaways from this trade. The first is a reinforcement of working on the assumption that I will seek to create credit transactions on contract adjustments, rather than debits, as I did in this case.  Second is to keep an eye on ex-dates, although I learned that one last month with COP. Third, and still unresolved – this seems to be a good trade, even though the shares don’t meet my criteria for having them in the portfolio; so I may need to have a way to resolve exceptions in the future…especially when there is the opportunity to participate in a “hot stock.”

My friend’s post – and note he has a lot more experience with covered calls than I do – is here: http://coveredcallsadvisor.blogspot.com/2011/11/roll-up-and-out-international-paper-co.html