DGI Adventure 11-17-16 Rollout Covered Call Option – Valero Energy Corporation (VLO) – Part Deux


Just last week I decided to roll out my VLO covered call position (which was pretty deep in the money) because I wanted to hold on to my shares through the ex-dividend date (which is tomorrow: 11/18).

I managed to execute that roll out for a net profit, albeit a fairly weak one when considered at an annualized rate. But that roll out was worth it to me because the dividend distribution is pretty significant (4% annualized at the strike price), plus that strike price was edged up a little higher from the previous.

Well the share price just kept on climbing this week pushing that new option I rolled out deeper and deeper into the money. Today’s closing price of $64.61 is another 3.5% up from where it closed last friday.

The intrinsic value of the option really took over the price of the contract, and it was trading today with only ~$0.30 – $0.50 of extrinsic value. The dividend payment is $0.60, and tomorrow is the ex-div date. That is a recipe for early assignment, so once again I looked to roll out for the second time in as many weeks.

The problem was that that the Dec 30th strikes weren’t trading with much more extrinsic value either. And the next available expiry was the Jan16 2017 monthlies, which didn’t have a $59 strike price available (the monthlies only separate the strikes in $2.50 increments so it was $55, $57.50, $60, etc…). I could have sold the Jan $60 strike, but the premium would have netted out for a loss compared with what it took to close the Dec23 contract.

That pushed me out to the next expiry which wasn’t until March 17, 2017. Again as a monthly, the strike prices available were limited, but even going up to the $60 strike, there was still plenty of extrinsic value to protect me from early assignment, and the premium roll netted as positive.

So that’s what I did. I’m not super happy about it, but I rolled out…again. Here are the particulars:

Original contract: Dec23 ‘16 $59 strike. Bought to close for: $5.50/share + $0.78 commission = $550.78

New contract: Mar17 ‘17 $60 strike. Sold to open for: $6.00/share – $0.80 commission = $599.20

So net premium = $48.42 received.

Divided by $6,000, which is the new amount of equity “at risk” that is a 0.81% absolute return, which is only 2.5% annualized when you remember that this will be in force for another 119 days.

That pushes this contract out past the next ex-dividend date, which I would expect to be in mid February sometime. If the share price holds in this mid-$60s range or keeps on climbing, I would expect to have to worry about early assignment again.

I’m not so sure I’ll be keen to roll out again.

But I have a while before I have to worry about that. My annualized returns for these roll outs have been pretty weak, but overall this VLO position has been doing great.

I added this table a while back to the VLO tab of my dividend income tracker:

Since I first opened a position back on June 8th, I will have collected $482.56 in options premiums and dividend distributions, and I will earn $700 in capital gains if the contract is exercised, which works out to a 22% total return. 

Not too shabby.

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