Sunday, January 8, 2012

Adjusting DRI: Roll-out

When I bought the DRI shares, one of my goals was to scoop them up before the ex-dividend date of 1-6, last Friday.  Over the few days I'd held them, they went into the money and I was worried that I might see them called away early, leaving me with the profit from the call premium but nothing else. 

Using my trading plan, this is okay, since I enter trades with two objectives:  1) to earn at least $100 on the trade, and 2) to earn a calculated annual return of 12% or more.  Here is the position summary from the entry trade (which assumed collection of the dividend of $86):

Total Net Profit if Assigned and dividend collected:  $114.49 + $86 + ($21.00) = $179.49
Absolute Return on Investment: ($179.49/$9,203.00) = 1.95%
Annualized Return if Assigned (21 days):  1.95*(365/21) = 31.51%

On Thursday, the day before the stock went ex-dividend, the price dipped below the $46 strike price.  I decided to take a look at whether an adjustment, rolling out from a January to February call, might be prudent.  On Friday, the January calls were moving pretty slow so I put a limit buy to close (BTC), and was able to pick up 2 contracts for $59.50 net, leaving me with a $55.01 profit on the first covered call trade with this stock. 

I then sold to open (STO) 2 February 46s for $146.49, and since I was now sure the shares were not going to be called away early, I recorded the dividend amount of $86 on my account history spreadsheet.  Here is the analysis of the position now that the roll-out is in place:

1/3/2012 Bought 200 shares at average share price $46.02 (total $9,203.00)
Net Profit Calculation:
·         Options Income:  = $201.48
·         Dividend Income: $86.00
·         Capital Appreciation if assigned at $46:  ($21.00)

Total Net Profit if Assigned and dividend collected:  $201.48 + $86 + ($21.00) = $266.48
Return on Investment Calculation:
Absolute Return on Investment: ($266.48/$9,203.00) = 2.90%
Annualized Return if Assigned (45 days):  2.90*(365/45) = 23.49%

Friday's close on DRI left the Feb 46 out of the money (OTM).

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