New Position: HPQ

With the proceeds from the assigned IP position hitting my account this morning, I did a screen for a replacement position.  I still have some ground to make up after taking the capital loss on ADM at the beginning of the month, so I decided to look for a stock trading in the $10 to $25 range, so that I could write multiple contracts and up my option premium income.

The details of the screen were:

• Share price between $10 and $25
• S&P 500 stock
• Ex-dividend next month
• S&P 3 stars or higher
• Within 35% of its 52-week low

There were six candidates, including BBY and HPQ.  Because of the stock turmoil BBY is going through with leadership changes, I decided HPQ would be the choice.  While I was completing this research, I saw that CSCO could be a similar play – but after further review, I found there was more upside on HPQ’s share price.  And so I decided to purchase a 400 share position.

Here’s the analysis: 

HPQ

Transactions

8/20/2012 Bought 400 shares at average share price $19.80 (total $7,919.00)
8/20/2012 Sold 4HPQ $20 Sep 2012 calls at $231.99)

9/10/2012 HPQ  ex-dividend date, if not called away early that is $0.132 per share

Net Profit:

1) Options Income:  $231.99
2) Dividend Income, if held at ex-date:  $52.80
3) Capital Appreciation if assigned at $20.00:  $63.89

Total Net Profit if Assigned and dividend collected:  $231.99 + $52.80 + $63.89 = $348.68
Absolute Return on Investment: ($248.68/$7,919.00) = 4.40%

If the stock is called on the ex-date, the position will still earn more than 3.00% for the 30 days.
Annualized Return if Assigned (20 days):  4.40%*(365/30) = 53.47%
HPQ was straddling an in-the-money situation for part of the day.