Thursday, March 13, 2014

Unwinding ABT

As the month of March began, I only had two contracts with expirations to look after:  ABT and KO.  Yesterday I posted about rolling out KO; late last week I also unwound ABT.  Rescue My IRA has no additional contract related activities to take care of this month. 

To recap my strategy on unwinding positions, it is a tactic I will look at whenever I have a stock that is in the money during its contract month, as the delta on that covered call reaches 1.00.  Essentially, there is no time premium left, and there is a window for closing out the position by buying to close the call and selling the stock.  The option premium will be just about the same as the value of the stock over and above the stock price.

There is a slight variation in the cost of executing these trades – at Scottrade, I pay commissions and fees on the option transaction and on the stock transaction, and these costs are in addition to the spread on the buy and sell transactions.  Offsetting the commissions is the assignment fee that I would incur at expiration – it’s a buck or two more than the cost of two commissions. 

Whenever I execute and unwind trade, I know I am giving up a few dollars on the transaction, but it is more than made up for if I can get the proceeds immediately invested in a new position – which I did in this case, and I will post tomorrow.  Until then, here is the final analysis of the ABT trade, net of commissions and fees:


Bought 400 shares at an average price of $36.88, total position basis $14,752.99
Sold on unwind 400 shares at $15,888.72. 
Total stock gain:  $1,135.73

Total options income:   -$491.03 (By unwinding, I exchanged the option premium for additional stock gains in this trade)

Total dividends collected:  $66.00

Net Profit:
Total Net Profit after Unwinding:  $710.70
Absolute Return on Investment: ($710.70/$14,752.99) = 4.82%
Annualized Return (90 days):  4.82%*(365/90) = 19.54%

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