Thursday, November 29, 2012

ARO CC vs CSP - New Positions

Once again there's been a lot of discussion on the JustCoveredCalls Yahoo group on the equivalence of ITM CC's vs OTM CSP's, so I decided to provide a "real life" example to show that these are truely equivalent positions. The stock, Aeropostale (ARO), was chosen at random and an ITM CC and OTM CSP was established today.

As you should be aware, option premium consists of intrinsic value (the difference between the stock price and the ITM strike price) and extrinsic value (sometimes referred to as time value). An OTM put has all extrinsic value, whereas an ITM call has both intrinsic and extrinsic value. Due to put/call parity, the extrinsic value of an ITM call and OTM put at the same strike/expiration should be equivalent. Extrinsic value is your income or profit, whereas intrinsic value is Return of Capital, or put another way, a refund or rebate on your investment. It's like going to the store with $20, buying a $20 product, and getting a $5 instant rebate. You actually paid $15 for the product and have $5 of your original $20 back in your hand. You didn't earn $5, you saved $5.

In the CC example below, you'll see that the call premium was split into two columns. The intrinsic value in the Stock Investment column, reducing the cost basis to the strike price of the call, and the extrinsic value in the Income Generated column. The $120.00 intrinsic value is back into the account, available for reinvestment, and is no longer part of the CC position. When accounting for it in this manner, the cost basis of the CC becomes the same as the cost basis of the CSP, which is the strike price, and the extrinsic value represents the true income generated, making it easier for comparison.

Below are the details of both positions. I'll provide ongoing updates as the positions are managed.

CC Position Summary

Aeropostale (ARO). All prices include IB commissions.

Cost Basis($1,200.00)
Income Generated$14.52
Percent Income Generated1.21%
Annualized Income Generated20.08%
Net Profit If Successful$14.52
Percent Return If Successful1.21%
Annualized Return If Successful20.08%
Days Held to Expiration22 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/29/2012AROInitial Stock PositionBTO 100 ARO @ 13.20 ($1,320.00) 
11/29/2012AROInitial Call OptionSTO 1 Dec12 12.00 Call @ 1.35 $120.00$14.52
12/21/2012ARO Totals ($1,200.00)$14.52
DTE22 Percent Income/Annualized 1.21%20.08%

CSP Position Summary

Aeropostale (ARO). All prices include IB commissions.

Cost Basis($1,200.00)
Income Generated$14.12
Percent Income Generated1.18%
Annualized Income Generated19.52%
Net Profit If Successful$14.12
Percent Return If Successful1.18%
Annualized Return If Successful19.52%
Days Held to Expiration22 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/29/2012AROCSP Margin UsedBTO 100 ARO @ 12.00 ($1,200.00) 
11/29/2012AROInitial Put OptionSTO 1 Dec12 12.00 Put @ 0.14  $14.12
12/21/2012ARO Totals ($1,200.00)$14.12
DTE22 Percent Income/Annualized 1.18%19.52%

Monday, November 26, 2012

VRSN - New Position

A new CSP position was established today on VeriSign (VRSN). All prices include IB commissions.

This is a position which requires a minimum of 15% Downside Protection and 15% Annualized Return.

CriteriaValue
Downside Protection37.73%
Annualized Return16.90%
Fair Value Estimate$48.00
Target Buy Price$28.80
Target Margin of Safety40.00%
Actual Buy Price$25.00
Actual Margin of Safety47.92%

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/26/2012VRSNCSP Margin UsedCSP 100 VRSN @ 25.00 ($2,500.00) 
11/26/2012VRSNInitial Put OptionSTO 1 Dec12 25.00 Put @ 0.29  $28.94

Position Summary

Cost Basis($2,500.00)
Income Generated$28.94
Percent Income Generated1.16%
Annualized Income Generated16.90%
Net Profit If Assigned$28.94
Percent Return If Assigned1.16%
Annualized Return If Assigned16.90%
Days Held to Expiration25 days

INTC - New Position

A new CSP position was established today on Intel Corp (INTC). All prices include IB commissions.

CriteriaValue
Dividend Champions StatusContender
Years of Consecutive Dividend Increases9
Fair Value Estimate$27.00
Target Buy Price$18.90
Target Margin of Safety20.00%
Actual Buy Price$19.00
Actual Margin of Safety29.63%

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/26/2012INTCCSP Margin UsedCSP 100 INTC @ 19.00 ($1,900.00) 
11/26/2012INTCInitial Put OptionSTO 1 Jan13 19.00 Put @ 0.42  $41.98

Position Summary

Cost Basis($1,900.00)
Income Generated$41.98
Percent Income Generated2.21%
Annualized Income Generated15.22%
Net Profit If Assigned$41.98
Percent Return If Assigned2.21%
Annualized Return If Assigned15.22%
Days Held to Expiration53 days

GES - New Position

A new CSP position was established today on Guess (GES). All prices include IB commissions.

This is a position which requires a minimum of 15% Downside Protection and 15% Annualized Return.

CriteriaValue
Downside Protection16.49%
Annualized Return16.31%
Fair Value Estimate$43.00
Target Buy Price$25.80
Target Margin of Safety40.00%
Actual Buy Price$21.00
Actual Margin of Safety51.16%

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/26/2012GESCSP Margin UsedCSP 100 GES @ 21.00 ($2,100.00) 
11/26/2012GESInitial Put OptionSTO 1 Jan13 21.00 Put @ 0.50  $49.74

Position Summary

Cost Basis($2,100.00)
Income Generated$49.74
Percent Income Generated2.37%
Annualized Income Generated16.31%
Net Profit If Assigned$49.74
Percent Return If Assigned2.37%
Annualized Return If Assigned16.31%
Days Held to Expiration53 days

COST - New Position

A new CSP position was established today on Costco Wholesale (COST). All prices include IB commissions.

CriteriaValue
Dividend Champions StatusContender
Years of Consecutive Dividend Increases9
Fair Value Estimate$116.00
Target Buy Price$92.80
Target Margin of Safety20.00%
Actual Buy Price$92.50
Actual Margin of Safety20.26%

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/26/2012COSTCSP Margin UsedCSP 100 COST @ 92.50 ($9,250.00) 
11/26/2012COSTInitial Put OptionSTO 1 Dec12 92.50 Put @ 0.65  $64.94

Position Summary

Cost Basis($9,250.00)
Income Generated$64.94
Percent Income Generated0.70%
Annualized Income Generated10.25%
Net Profit If Assigned$64.94
Percent Return If Assigned0.70%
Annualized Return If Assigned10.25%
Days Held to Expiration25 days

Monday, November 19, 2012

TEVA - Adjustment

The following adjustment was made today on Teva Pharmaceutical Industries Ltd (TEVA). All prices include IB commissions.

CriteriaValue
Dividend Champions StatusContender
Years of Consecutive Dividend Increases13
Fair Value Estimate$55.00
Target Buy Price$38.50
Target Margin of Safety30.00%
Actual Buy Price$40.00
Actual Margin of Safety27.27%

*Fair Value was lowered from $58 to $55 since inception which lowered my 31.03% Margin of Safety to 27.27%.

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/19/2012TEVAContinued TradeSTO 1 Dec12 40.00 Call @ 0.44  $44.24

Current Position Summary

Cost Basis($4,000.00)
Income Generated$160.55
Percent Income Generated4.01%
Annualized Income Generated5.35%
Net Profit If Assigned$160.55
Percent Return If Assigned4.01%
Annualized Return If Assigned5.35%
Days Held to Expiration274 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/22/2012TEVACSP Margin UsedCSP 100 TEVA @ 40.00 ($4,000.00) 
3/22/2012TEVAInitial Put OptionSTO 1 May12 40.00 Put @ 0.51Exercised $50.97
5/18/2012TEVACSP Margin ReturnedCSP 100 TEVA @ -40.00 $4,000.00 
5/18/2012TEVAStock AssignedEX 1 May12 40.00 Put @ -40.00 ($4,000.00) 
6/25/2012TEVAContinued TradeSTO 1 Jul12 42.50 Call @ 0.19Expired $19.27
7/27/2012TEVAContinued TradeSTO 1 Sep12 45.00 Call @ 0.25Expired $25.24
9/4/2012TEVADividend ReceivedSTO 100 Dividend @ 0.25  $24.80
9/4/2012TEVAWitholding TaxTAX 1 Withholding Tax @ -0.04  ($3.97)
11/19/2012TEVAContinued TradeSTO 1 Dec12 40.00 Call @ 0.44  $44.24
12/21/2012TEVA Totals ($4,000.00)$160.55
DTE274 Percent Income/Annualized 4.01%5.35%

TBT - Adjustment

The following adjustment was made today on ProShares UltraShort 20+ Year Treasury (TBT). All prices include IB commissions.

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/19/2012TBTContinued TradeSTO 1 Dec12 60.00 Call @ 1.72  $172.26

Current Position Summary

Cost Basis($6,000.00)
Income Generated$268.20
Percent Income Generated4.47%
Annualized Income Generated22.05%
Net Profit If Assigned$268.20
Percent Return If Assigned4.47%
Annualized Return If Assigned22.05%
Days Held to Expiration74 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/8/2012TBTCSP Margin UsedCSP 100 TBT @ 60.00 ($6,000.00) 
10/8/2012TBTInitial Put OptionSTO 1 Nov12 60.00 Put @ 0.96Exercised $95.94
11/16/2012TBTCSP Margin ReturnedCSP 100 TBT @ -60.00 $6,000.00 
11/16/2012TBTStock AssignedEX 1 Nov12 60.00 Put @ -60.00 ($6,000.00) 
11/19/2012TBTContinued TradeSTO 1 Dec12 60.00 Call @ 1.72  $172.26
12/21/2012TBT Totals ($6,000.00)$268.20
DTE74 Percent Income/Annualized 4.47%22.05%

NSC - Adjustment

The following adjustment was made today on Norfolk Southern Corporation (NSC). All prices include IB commissions.

CriteriaValue
Dividend Champions StatusContender
Years of Consecutive Dividend Increases11
Fair Value Estimate$85.00
Target Buy Price$59.20
Target Margin of Safety30.00%
Actual Buy Price$60.00
Actual Margin of Safety29.41%

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/19/2012NSCContinued TradeSTO 1 Dec12 60.00 Call @ 0.52  $51.94

Current Position Summary

Cost Basis($6,000.00)
Income Generated$156.88
Percent Income Generated2.61%
Annualized Income Generated16.45%
Net Profit If Assigned$156.88
Percent Return If Assigned2.61%
Annualized Return If Assigned16.45%
Days Held to Expiration58 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/24/2012NSCCSP Margin UsedCSP 100 NSC @ 60.00 ($6,000.00) 
10/24/2012NSCInitial Put OptionSTO 1 Nov12 60.00 Put @ 1.05Exercised $104.94
11/16/2012NSCCSP Margin ReturnedCSP 100 NSC @ -60.00 $6,000.00 
11/16/2012NSCStock AssignedEX 1 Nov12 60.00 Put @ -60.00 ($6,000.00) 
11/19/2012NSCContinued TradeSTO 1 Dec12 60.00 Call @ 0.52  $51.94
12/21/2012NSC Totals ($6,000.00)$156.88
DTE58 Percent Income/Annualized 2.61%16.45%

CSX - Adjustment

The following adjustment was made today on CSX Corporation (CSX). All prices include IB commissions.

CriteriaValue
Dividend Champions StatusChallenger
Years of Consecutive Dividend Increases8
Fair Value Estimate$31.00
Target Buy Price$21.70
Target Margin of Safety30.00%
Actual Buy Price$20.00
Actual Margin of Safety35.48%

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
11/19/2012CSXContinued TradeSTO 1 Dec12 20.00 Call @ 0.24  $24.09

Current Position Summary

Cost Basis($2,000.00)
Income Generated$51.33
Percent Income Generated2.57%
Annualized Income Generated16.15%
Net Profit If Assigned$51.33
Percent Return If Assigned2.57%
Annualized Return If Assigned16.15%
Days Held to Expiration58 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/24/2012CSXCSP Margin UsedCSP 100 CSX @ 20.00 ($2,000.00) 
10/24/2012CSXInitial Put OptionSTO 1 Nov12 20.00 Put @ 0.27Exercised $27.24
11/16/2012CSXCSP Margin ReturnedCSP 100 CSX @ -20.00 $2,000.00 
11/16/2012CSXStock AssignedEX 1 Nov12 20.00 Put @ -20.00 ($2,000.00) 
11/19/2012CSXContinued TradeSTO 1 Dec12 20.00 Call @ 0.24  $24.09
12/21/2012CSX Totals ($2,000.00)$51.33
DTE58 Percent Income/Annualized 2.57%16.15%

Sunday, November 18, 2012

SVXY - Closed

The ProShares Short VIX Short-Term Futures (SVXY) Nov12 50.00 Put expired and the position was closed. All prices include IB commissions.

Position Summary

Cost Basis$5,000.00
Net Profit$58.94
Percent Return1.18%
Annualized Return11.03%
Days Held to Expiration39 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/8/2012SVXYCSP Margin UsedCSP 100 SVXY @ 50.00 ($5,000.00) 
10/8/2012SVXYInitial Put OptionSTO 1 Nov12 50.00 Put @ 0.59Expired $58.94
11/16/2012SVXYCSP Margin ReturnedCSP 100 SVXY @ -50.00  $5,000.00
11/16/2012SVXY Net Cost/Profit-Loss ($5,000.00)$58.94
DTE39 Percent Profit-Loss/Annualized 1.18%11.03%

COV - Closed

The Covidien (COV) Nov12 52.50 Put expired and the position was closed. All prices include IB commissions.

Position Summary

Cost Basis$5,250.00
Net Profit$48.94
Percent Return0.93%
Annualized Return14.79%
Days Held to Expiration23 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/24/2012COVCSP Margin UsedCSP 100 COV @ 52.50 ($5,250.00) 
10/24/2012COVInitial Put OptionSTO 1 Nov12 52.50 Put @ 0.49Expired $48.94
11/16/2012COVCSP Margin ReturnedCSP 100 COV @ -52.50  $5,250.00
11/16/2012COV Net Cost/Profit-Loss ($5,250.00)$48.94
DTE23 Percent Profit-Loss/Annualized 0.93%14.79%

ANF - Closed

The Abercrombie & Fitch (ANF) Nov12 25.00 Put expired and the position was closed. All prices include IB commissions.

Position Summary

Cost Basis$2,500.00
Net Profit$26.24
Percent Return1.05%
Annualized Return16.66%
Days Held to Expiration23 days

Trade History

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/24/2012ANFCSP Margin UsedCSP 100 ANF @ 25.00 ($2,500.00) 
10/24/2012ANFInitial Put OptionSTO 1 Nov12 25.00 Put @ 0.26Expired $26.24
11/16/2012ANFCSP Margin ReturnedCSP 100 ANF @ -25.00  $2,500.00
11/16/2012ANF Net Cost/Profit-Loss ($2,500.00)$26.24
DTE23 Percent Profit-Loss/Annualized 1.05%16.66%