APD - Closed

The APD Jan09 45.00 call was exercised today and the stock was called away for a profit. This is one of those rare times when a stock is called away early.

APD went ex-dividend on 12/30/08, so I still qualify for the dividend. Obviously, that wasn't the reason for the early exercise. So, let's look at why this might have been exercised early. Let's assume that the same person who bought the Jan09 45.00 call I sold decided to exercise it. In reality, it could have been another buyer, but we'll assume it was the same buyer for this example.

The buyer paid $229.00 for the Jan09 45.00 call, which now has a bid of $11.50. The buyer could have sold it and received $1,150 for a net gain of $921.00 (1150-229). By exercising the call the buyer paid $4,500.00 for 100 shares, for a net total investment of $4,729.00 (4500+229). With the bid at $56.93, the buyer could sell the stock tomorrow and have a net gain of $964.00 (5693-4729). Since exercising provided a bigger profit than selling the call, that's a good reason to exercise early.

I considered closing this position early, since it achieved over 80% of it's expected return, but it would have cost me the bid/ask spread plus two commissions, so I decided to hold it until it either got called away early or until expiration. Now that it got called away, I'll probably establish a new position in APD tomorrow.

The following is the trade history and returns, including IB commissions.

Covered Call Results

Stock Investment: $4,568.00
Income Generated: $273.00
Net Profit: $205.00
Percent Return: 4.49%
Annualized Return: 102.38%
Duration of Trade: 16 days

Trade History:

22-Dec-08 - Initial Stock Position - BTO 100 APD @ 45.68 -
22-Dec-08 - Initial Call Option - STO 1 Jan09 45.00 Call @ 2.29 - Exercised
09-Feb-09 - Dividend Received - DIV 100 Dividend @ 0.44 -
07-Jan-09 - Option Exercised - EX 1 Jan09 45.00 Call @ 45.00 -