DGI Adventure 08-09-16 Roll Out Covered Call Option – Valero Energy Corporation (VLO)

VLO goes ex-dividend today, and the quarterly distribution is $0.60/share. I mentioned last week that I would be on high alert for a situation that could lead to early assignment.

My covered call option, which had a strike price of $54.50, was about to expire on Friday August 12. VLO shares traded as high as $54.62 yesterday (in the money), and the price of that call contract ranged as low as $0.22/share.

VLO shares closed at $54.19, which means that contract ended up out of the money by $0.31/share. But owning shares yesterday entitled you to a $0.60/share dividend. I don’t think there were too many scenarios where it made a lot of sense to exercise the option early, but who knows?

It doesn’t have to be a major advantage for it to make sense to the robots. The point is, it was awfully close. Plus I had the opportunity to roll out at a higher strike price and still book a very tidy profit, so I went for it.

I bought back the Aug 12 contract for a total of $39.78 ($0.39/share + $0.78 commission), I then sold a Sept 02 call with a $55.00 strike for $98.21 ($0.99/share – $0.79 commission).

The roll out netted $58.43, which divided by $5,500 (the new denominator based on the new strike price) is an absolute return of 1.06%. The trade is in force for 25 days, so it works out to a 15.5% annualized return.

That is a pretty good trade in and of itself. Of course if the contract does end up being exercised on Sept 02, I will also book a $2.60/share capital gain ($2.00 share price appreciation, plus the dividend payment I saved yesterday).

Since my initial capital outlay was $53.00/share, $2.60 is a 4.91% absolute return. Since I took ownership of the shares on June 24th, the capital gains would be returned in 70 days. So that’s 25.6% annualized

In hindsight, I imagine that there won’t be too many of those Aug 12 options exercised. But I’ll bet some will be, and I didn’t want to take the chance that mine would be picked by the randomizer.

I wanted that dividend, and I made sure to get it, all while improving the position and outlook of an already pretty good trade.

Thanks Mr. Market!

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