August ’09 option expiration results

August 23rd, 2009 · No Comments

I had two covered call positions waiting on August expiration, which was Saturday.  My AA HO (Aug 09 $13 strike) almost certainly expired as AA closed at $12.56 on Friday — I just can’t be sure until Monday morning given past experiences with TradeKing notification.  And I’ve received assignment notification on the short-term JGL HY (Aug 09 $27.50) play even though HD closed at exactly $27.50 Friday.  Not quite sure why some one would exercise that, but they did.  So what do I do next?

One call assigned, so back to cash

One call assigned, so back to cash

To be fair, TradeKing has removed the AA HO option from my account summary page, but the Activity page doesn’t show a line item for it’s expiration.  Given that this is the first time I might have ever had a call option simply expire in a TradeKing account, I’m not sure if they ever show expiration as activity line items.  Safest to wait until Monday morning and just plan for both possibilities — starting out holding 200 shares of AA or being liquidated to cash.  It’s worth pointing out that my cost basis on the AA is $11.65, so even if the call wasn’t assigned, I can still sell the shares for a profit.  Using Friday’s closing price of $12.56, I’d be up $183.29 for the round trip, or a 7.87% return.  Over the 32 days for which the capital was locked up in this trade, that would be a 137.22% annualized yield.  However, given my bullish belief in AA (yes even though the news is reporting high inventories of aluminum) I’d probably only do this if I identified a much better ROI trade for September expiration.

Another possibility is to simply sell new calls against the AA shares.  The similar strike call for AA but with Sept expiration had a bid/ask midpoint of $0.53 on Friday’s close, so selling those would net me about $100 after commissions.  Or you could think of that as lowering my cost basis to $11.15.   If AA exceeded the $13 strike by September expiration, that would be a profit of about $365, a return of about 15.7%.  Given the new 50 days total holding period for the trade, that would be annualized yield of about 189%.  Not bad at all.

Given that I’m bullish on AA, what about looking at the $14 strike instead?  This call had a bid/ask midpoint of $0.225 at Friday’s close, so selling 2 calls would net just under $40 after commissions, lowering my cost basis to $11.45.  In addition, this trade would let me capture some additional upside ($200 worth) should I be right about being bullish.  If the call is assigned, I’d be looking at a profit of about $505 in this case.  The yield of about 21.7% would turn into an annualized yield of around 318%.   But there’s alot more risk of the call not being assigned in this case, and the bulk of the profit comes from that happening.  Otherwise, I’m only collecting an additional $40 of income, or a 1.7% yield (about 24% annualized.)

I’m not sure what to do at this point, but given that I need to research new trades since the HD/JGL HY trade was closed out, I’ll probably wait to decide until I’ve done the research for using that cash and can determine how much capital I can put toward whatever looks good there.   If I feel more confident in something with a higher ROI that could use the full portfolio, it certainly makes sense to sell the AA.   There’s always the chance that I simply do another buy-write with HD and then only need the capital I already have in cash at the moment.

Tags: Trades

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