Thursday, March 14, 2013

Ex-dividend Day After Action (URS, UNH, MRK)

A quick follow-up to my post earlier this week - I noted that I had three positions with ex-dividend dates of 3/13: MRK, UNH, and URS, and was analyzing the prospects of whether I could expect any of the April covered calls I had written on them to be exercised.

I used the delta value for these options as a proxy for the probability of the call being exercised.  In the case of UNH and MRK, a low delta value made it seem unlikely that the shares would be called away, but the 1.00 delta on URS suggested a 100% likelihood that I could expect action on those shares.  I was partially right about this, as it turns out.

First, before I write about URS, let's consider the trading action on MRK over the last few days.  The delta value was low - below .5 - leading up to 3/13, and the position was out of the money.  On 3/12 there was a big move up on the underlying shares and the option moved to an in the money situation - the delta on the option moved to 1.00.  For a moment there was a chance the shares would be called away.

That did not happen in the end - there is still a month of time value left in the April contract and the difference between stock and strike prices was only marginally higher than the dividend amount.  In the end, I'm still holding MRK with a 44 April contract, and I will collect the dividend on the shares.

Moving on to URS - these shares were in the money by more than $5 as of 3/12, and as I noted above and in the previous post, the 40 April call had a delta of 1.00.  If I held those calls, I would have exercised and taken the dividend and the $5.00+ gain on the shares.  So I thought an early call was likely, and as it turned out, two of the four lots I held were called.

I will post either interim or final results on this position the next time I make an adjustment on the covered call, or when the option is assigned.  However, for now, I'm in a pretty good spot with URS:  half of the position has been sold and a small gain on the shares was recorded, and I collected the dividend on the remaining shares, which are still in the money.

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