Thursday, May 17, 2012

Closing out COP

Earlier in the month I realized that the 100 share position in COP no longer fit in with my trading plan.  The company has been working on a strategy to spin off a portion of its assets and their action finally came to be with the issuance of 50 shares in PSX.  This was done as a dividend of 50 shares for every 100 share lot in the parent stock.  The problem was that my option contract on COP was now adjusted to be for 100 shares in COP and 50 in PSX. 

PSX is not currently a dividend payer and is unrated by S&P - two strikes against holding it in the Rescue My IRA account.  My normal strategy would have been to immediately divest the shares, but the option contract on COP was now adjusted to be for 100 shares in COP and 50 in PSX.  A second impact was the adjustment of the COP shares to reflect the spin-off. 

I’d held this lot of COP since November, and would have been content to maintain them for a while longer if they still met the requirements of the trading plan.  Instead, I divested the whole package at a slight loss.

Here’s the analysis:

Original November 2011 investment: 100 shares, $6988, average share price $69.88
Option Premiums (total – 8 contracts):  -$62.31
Dividends Collected (includes 50 shares of PSX):  $1,558.96
Stock Loss (sale price of $53.13 per share, adjusted by value of PSX dividend):  -$1,683.80
Total:  -$187.15
Absolute return -2.68%
Annualized return (210 days) -4.65%

Lesson Learned:  I had a good ride with COP, especially considering the early call I had on the previous COP position last October.  I probably could have gotten the position into a break-even status by waiting another month, but I feel like I took the correct action on this position to comply with my trading plan.  There is the problem with the net negative income off of the option premiums – this is the result of chasing the strike price up the ladder – although breakeven on the shares was at 70, I held contracts for 72.50, 75, and 77.50 during the course of this position.  I think I’ve summarized the impact of closing current contracts to chase a higher strike in a past post, and that is where the small loss came from – I’ve already fine-tuned my behavior in this regard to ensure I am always getting a net credit – a positive result – on contract trades.  

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