Thursday, April 11, 2013

April Contract Deltas: ITW, MRK, and UNH

Three of the Rescue My IRA covered call contracts have April expirations.  With the market chugging along at record highs this week, all of them are now in the money, so I wanted to take a minute to look at their deltas and see if I could estimate the likelihood of these shares being called away.  

Here are the three positions: 

·          ITW, April 60 contract, yesterday’s close at $62.58, 1.00
·          MRK, April 44 contract, yesterday’s close at $46.84, delta .93
·          UNH, Apr 57.50, yesterday’s close at $62.41, delta 1.00

I like to use the delta as a probability metric as expiration day approaches.  In this case, with all three stocks up more than $2.00 from my strike prices, MRK is still deemed volatile enough that the delta is not 100%.  At 93% there is still a high probability that the stock will be assigned next Friday. Assuming that the contracts will be exercised, all three positions are hat tricks, meaning I’ve collected covered call premiums, dividends, and prospectively a stock gain.  In fact, I stand to record gains of $966 on these shares if there are assigned, making this an exceptional month on that account.  

If the market holds a few more weeks, May will be as good or better – I have six positions with May expirations right now. So we’ll revisit these shares next week after expiration day.  

Until then, happy trading!

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