Unwinding WIN

Once a position reaches expiration month, if it is in the money, sometimes the option’s delta reaches 1.00.  When that happens, the value of the option changes in step with the value of the underlying stock, and it is a good time to consider unwinding the position.  This process involves buying to close the option and selling the stock at the current price.

In the case of my Scottrade account, I will usually make a little more cash than I would if I waited until expiration.  Part of this extra return is generated because the sell commission on an assigned position is about $18.00, while the commission on the option and stock trade totals about $14.00.  There is sometimes a little extra return in the stock price during the time lag between closing the option and selling the stock also – but I haven’t found that to be predictable yet.

The main opportunity is from being able to generate new covered call premiums and stock gains from a new position opened up two to three weeks earlier than you would have been able to, had you waited.  That’s been the reason I’ve unwound positions over the last two or three months, and it is the case with my WIN position.

I’ll report two “unwind” transactions today – one for the 500 share position I had in Rescue My IRA, and one for the 300 share position I had in my conventional account.  The second position was established a few days after the Rescue My IRA one, and the returns were just a little less – but both positions worked out very well for me.  I might just take another look at WIN next month, as the next ex-dividend date approaches.

Here’s the analysis – net of fees and commissions, of course.

WIN (Rescue My IRA position)

Shares:

Bought 500 shares at an average price of $7.92, total position basis $3,962.00

Sold after unwinding 500 shares at $4,167.92.

Total stock gain:  $205.92

Options:

Total options income:  -$36.51

Dividend:

Total dividends collected:  $125.00

Net Profit:
1) Stock gains:  $205.92

2) Options income:  -$36.51

3) Dividend Income: $125.00

Total Net Profit:  $294.41

Absolute Return on Investment: ($294.41/$3,962.00) = 7.43%
Annualized Return (60 days):  7.43%*(365/60) = 45.20%

WIN (Conventional account position)

Shares:

Bought 300 shares at an average price of $7.97, total position basis $2,392.00

Sold after unwinding 300 shares at $2,497.95.

Total stock gain:  $105.95

Options:

Total options income:  -$64.03

Dividend:

Total dividends collected:  $75.00

Net Profit:
1) Stock gains:  $105.95

2) Options income:  -$64.03

3) Dividend Income: $75.00

Total Net Profit:  $116.92

Absolute Return on Investment: ($116.92/$2,392.00) = 4.89%
Annualized Return (60 days):  4.89%*(365/60) = 29.74%