Something Different with HPQ

Well, normally when I write about an adjustment I’ve made to a position, it’s a roll-out, where I buy-to-close an existing covered call and the sell-to-open a new covered call at the same strike price in a month further out the calendar. Sometimes, I have also done a roll-up, where I sell a new covered call at a higher strike price on an existing position, either in the same month as one I have just closed, or potentially going out a month or two.

Today I am writing about doing the opposite of both on my HPQ position, where I recently sold a covered call at a lower strike price and I sold it in a near-month.  It’s a roll-in and roll-down!

When I’ve had positions take their lumps in the past – as with ACM and ADM – I’ve usually just closed the positions at a loss and reinvested the proceeds.  This time, I think there is still value and opportunity in the underlying HPQ, and I wasn’t ready to write the investment off.

So there remains some risk in the position, that I could have the stock called away at a price that ensures a stock loss, but by setting this trade up to roll on a month-to-month basis, I think I can manage that risk until the stock price recovers…admittedly, that could be a while with this one.  I’ve decided to try and stick it out to see how it goes.

Here’s the analysis of the position.

HPQ

The HPQ position consists of 500 shares.  My basis is $19.23 per share, and the stock is trading way below that.  I had been selling 20 strikes in the back months, when I decided to set lower strike prices in near months and go for yield.  So now I am selling 16 strikes and rolling them monthly. 

Total option premiums:  $538.20

Total dividend payments:  $52.80

Total stock loss at $16:  -$1,634.10

If called, there would be a loss on the whole position.  But as I mentioned, I plan to hold HPQ for the longer term and manage it back to a profitable level. 

Total, absolute return percentage, just counting dividends and option premiums ($591.00/$9,616.99):  6.15%

Annualized total return percentage (held approx 140 days):  16.02%