Covered call: AFL and AJO HE

July 14th, 2009 · 2 Comments

Today, we had more transferred funds clear the ACH waiting period in our TradeKing account / GI portfolio, so we were able to execute another covered call: AJO HE (Aug09 $31) and the underlying Aflac (AFL).

image: http://www.freeimages.co.uk/

image: http://www.freeimages.co.uk/

As I mentioned in my last post, this time we concentrated on finding a dividend paying security whose ex-dividend date will likely (nothing is for certain when it comes to undeclared dividends) fall within the period for which we’ll be holding the underlying shares. To do this, we started with the 2009 edition of the S&P Dividend Aristocrats list. We then filtered out any company that had cut its dividend since the list was produced, or hadn’t increased its dividend in the last 5 calendar quarters. Given that July expiry is only 3 days away, we then filtered the list down to those companies whose ex-dividend date would be between tomorrow and August expiration (Aug 22, 2009). We also filtered it down to companies that looked like a net debit for the covered call would be $3,000 or less. And finally, we attempted to balance the premium potential against our thoughts on where the stock price might end up by August expiry. This led us to pick Aflac as the underlying, and a $31 strike for August as our call option.

BTW, Aflac makes it pretty easy to guess at their next dividend date of record: they publish a calendar of all relevant investor information which shows the next date of record will be August 19. Which means the ex-dividend date will be Monday August 17th — 5 trading days before August expiration.

Here’s my analysis:

Critical dates
2009.07.14: Initial position: BTO 100 AFL @ $31.28 (including commissions)
2009.07.14: Initial call option: STO 1 AJO HE (Aug09 $31) @ $2.42 (after commissions)
2009.08.17: Dividend received: DIV 100 @ $0.28

Summary, if called 1 day prior to ex-dividend date
Days position held: 30 (call would have to assign on Friday, August 14th)
Capital investment: $3127.95
Income received: $242.39
Net profit if called: $209.49 (after commissions)
Percent return if called: 6.70%
Annualized yield if called: 120.06%

Summary with dividend if called at expiration
Days position held: 38
Capital investment: $3127.95
Income received: $270.39
Net profit if called: $237.49 (after comissions)
Percent return if called: 7.59%
Annualized yield if called: 101.96%

Of course, there’s always the chance that the shares won’t be called away at all, in which case I’ll have lowered our basis price for each share to $28.58.  And I’ll then be looking to sell Sept calls against the position.

Tags: Options · Trades

2 responses so far ↓

  1. 1 davmp // 2009.07.23 at 9:03 am

    AFL is currently trading at $35.01 and showing signs of going even higher. Perhaps it is a bit premature for this, but I’m toying with the idea of a call swap. I looked briefly into this yesterday, doing a BTC of my $31 strike for Aug, and STO a new $33 strike also for Aug. I would have had to pay about $1.20 per share to do so though, for a net of $0.80. Clearly I didn’t do it yet, but I’m still thinking about such things.

  2. 2 Can I get more out of a deep ITM covered call? | Geographic Independence // 2009.07.29 at 6:23 am

    […] two weeks ago, I made a covered call play with AFL and the $31 strike for August expiration.  AFL closed yesterday at $36.60, so my call is deep in-the-money.  Looks like I way misjudged […]

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