Replaced AA HL with AA HO

August 5th, 2009 · 2 Comments

Just a brief note to record that on the 3rd, I adjusted our AA covered call by buying back the AA HL ($11 strike) options and selling replacement AA HO ($13 strike) options for a net debit of $1.33255 (including commissions).

For the last week or so I’ve been doing even more research on Alcoa, which resulted in a growing bullish feeling.  I now think it very likely AA will be trading above $13 at August expiration.  As a result, I looked into what the spread was on swapping my existing $11 strike for a $13 strike, and found the net debit was within what I considered a reasonable risk range for the additional return by two ways of measuring.  First, the additional capital invested brings our cost basis up to $11.65/share, which I felt was reasonable given my valuation analysis of Alcoa and how I think it will perform over the next year.  Second, the debit was low enough that the return if the options were assigned at August expiration would almost double ($271 vs. $137).

Tags: Trades

2 responses so far ↓

  1. 1 Kimberly // 2009.08.05 at 5:10 pm

    What’s the difference between AA HL and AA HO? By which I mean, what do the HO and HL stand for.

  2. 2 davmp // 2009.08.05 at 5:29 pm

    In this particular case, ‘AA HL’ breaks down like this: “AA” is a reference to the underlying security from which the option is derived, ‘H’ represents the month of expiration for the option (August), and ‘L’ represents the strike price of the option ($11.00). Most of that is the same for ‘AA HO’ except the ‘O’ represents a different strike price, in this case $13.00. The strike price is the agreed upon price at which the option may be exercised at.

    It is probably worth noting that while the first part of an option symbol does represent the underlying security, it is not always exactly equal to the symbol for that underlying security. (‘AA HL’ is just special that way.) It may differ for different types of options, for example ‘AJO HE’ is an option derived from ‘AFL’ (the symbol for Aflac’s stock registered at the NYSE.) To be honest, I’m not 100% sure where the differences come from – regular options vs. LEAPs vs. adjust options, or perhaps something else?

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