Belated: Another dance with AFL

November 9th, 2009 · No Comments

Continuing my catch up on recent trades, I did another covered call against AFLAC (AFL) for November expiration.  This time, I stepped back from using a screening tool and simply looked for an opportunity where the underlying position was something I’d feel comfortable holding for a couple months if I got caught holding it past expiration.

Things go up, then they go down, and hopefully up again.

Things go up, then they go down, and hopefully up again.

Don’t get me wrong, I still have other constraints to consider. Like the size of my portfolio, and portion of available funds within that portfolio, which certainly limits the stocks in which I can take a 100 share position in.  While most investing guides indicate that you shouldn’t put a large percentage of your portfolio in a single investment, I’m pretty much doing the exact opposite.  That’s because (a) this portfolio is a small percentage of my overall investments, and (b) I’d rather take a large position in something I’m comfortable in than many small positions in something I’m not.   So, when looking around for opportunities after October expiration, I was looking for something that required up to, but no more than, $6,000 in capital to establish.

I again started out by looking through the Dividend Achiever’s list, trying to find something that would both be highly likely pay a dividend prior to Nov expiration, have a good time premium, be a business I believed in after doing my background research, and not require more than my $6,000 in capital.   Fortunately, AFL looked like it had an ex-dividend date coming up, had good premiums on calls, and still seemed to be doing well as a business (Good P/E ratio, P/S ratio, and I still like AFL enough to have long-term long positions in it.)  Plus, I have previously done a covered call against AFL in my GI portfolio.  And it would easily fit within my capital requirements.

Here’s the summary of the position I took and possible outcomes.  As usual, my actual commissions at TradeKing are factored in, and thus some numbers go out to fractions of a cent.

Critical dates
2009.10.21: Initial position: BTO 100 AFL @ $45.5195
2009.10.21: Initial call option: STO 1 AJO KY (Nov09 $47) @ $1.0539
2009.11.16: Dividend predicted: DIV 100 @ $0.28

Summary, if not called
Days position held: 30
Capital investment: $4,551.95
Income received: $133.39
Percent return: 2.93%
Annualized yield: 42.11%

Summary, if called 1 day prior to ex-dividend
Days position held: 25
Capital investment: $4551.95
Net profit: $248.49
Percent return: 5.46%
Annualized yield: 117.28%

Summary if called at expiration
Days position held: 30
Capital investment: $4551.95
Net profit: $276.49
Percent return: 6.07%
Annualized yield: 104.92%

I should note that I purposefully went a little bit more bullish on this position than I had been going in more recent covered call positions.  Which means, I picked a higher strike than I otherwise would have.  That hasn’t worked so well for me as of the time of this writing, as instead of going up, AFL has gone down to $42.19 as of this past Friday’s close.  That’s well below my cost basis of $44.47.  But this is certainly a position I’d just turn around and sell new calls for the next month if this month’s call expires worthless.

Tags: Trades

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