Opened (FCX) February 2009 covered call position for FREEPORT MCMORAN

A new covered calls position was established on January 8, 2009 with purchase of 1000 shares of "FREEPORT MCMORAN " (FCX). Here are the details.

• Transaction Date = 20090108
• Ticker = (FCX)
• Company Name = FREEPORT MCMORAN

Stock Leg (Buy)

• Number of shares purchased = 1000
• Price per share = 29.25
• Total money spent = 29250.0

Option Leg (Sell)

• Call Symbol = FCXBE
• Number of sold calls = 10
• Strike price = 25.0
• Strike date = 20090220
• Call premium = 6.0
• Total money received = 6000.0
• Max. days for which position may stay open = 44

Return on investment (If calls are exercised)

• Initial investment = 23250.0
• Absolute return = 1750.0
• Percentage return = 7.52%
• Annualized percentage return = 62.38%

Break even Information

• Break even price point = 23.25
• Break even buffer percentage = 20.51%

Detailed Calculations & Explanation

Stock Leg (Buy)
Total money spent = price per share * number of shares
Total money spent = 29.25 * 1000 = 29250.0

Option Leg (Sell)
Total money received = number of sold calls * 100 * call premium
Total money received = 10 * 100 * 6.0 = 6000.0

Transaction
Initial investment = Total money spent - Total money received
Initial investment = 29250.0 - 6000.0 = 23250.0

ROI calculations (If calls get exercised)
Money received upon exercise = (number of sold calls * 100 * strike price)
Money received upon exercise = 10 * 100 * 25.0 = 25000.0
Absolute returns = Money received upon exercise - Initial investment
Absolute returns = 25000.0 - 23250.0 = 1750.0
Percentage returns = 100 * (Absolute Returns/Initial investment)
Percentage returns = 100 * (1750.0/23250.0) = 7.52%
Annualized percentage returns = Percentage returns * 365/Max. days for which position may stay open
Annualized percentage returns = 7.52 * 365/44 = 62.38%

Break Even Information
Break-even point = Initial investment / Number of shares
Break-even point = 23250.0 / 1000 = 23.25
Break-even buffer percentage = 100 * (Current price - Break-even point) / Current price
Break-even buffer percentage = 100 * (29.25 - 23.25) / 29.25 = 20.51%
This means that this position can weather a 20.51% drop in stock's price before losing any money.

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).
The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.