Wednesday, May 25, 2016

Covered Call : Potash Corporation

       I recently wrote about a purchase in my margin account involving Potash Corporation of Saskatchewan. Potash Corporation of Saskatchewan is involved in the mining and agricultural space.  Everyone on the planet needs to eat to survive, so fertilizer is needed to help grow the food.  The minerals from the potash mines are used in the making of the fertilizers.

      To increase my returns besides the dividends,  I wrote a covered call on May 17 with a June 17, 2016 with a $22.00 strike price.  The premium I received was $45.05 after commissions.


Scenario #1 - Option expires worthless

# of days to expiration = 31
Premium Received =  $45.05 including commissions

Return =  $45.05/$(2200)
            = 2.05%

So I made make a 2.05% return in 31 days.

Return Annualized = 2.05% *(365/31)
                               = 24.11%

For writing a covered call, we get a return of 2.05% in less than a month whereas my high interest savings account  pays 0.80% interest yearly.  

Scenario #2 - Option is assigned 

Adjusted cost basis = $2179.95 including commissions
Premium received = $45.05 including commissions
Option Assignment Fee = $ 24.95
Strike Price = $22.00

Profit = $2200+$45.05-$24.95-$2179.95
          = $40.15

Return = $40.15 /(2179.95)
            = 1.84%

Without option, the return will be smaller as the capital gain (i.e. profit ) is smaller

Return =( $2200-$4.95-$2179.95)/ $2179.95
                                         = 0.693%

     If the price of POT stays below $22.00 at or before expiration, I get to keep my premium of $45.05 and keep my 100 shares.  If the option is assigned, my return is greater due to me keeping the premium.

Disclosure : Long POT

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

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