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Tuesday, June 2, 2009

Roll-Up -- iShares Russell 2000 Small Cap Index ETF

A Covered Calls Advisor Portfolio (CCAP) covered calls position in iShares Russell 2000 Small Cap Index ETF (IWM) was rolled-up today (06/02/09) from the Jun09 $47s to the Jun09 $53s. The debit-spread transaction was executed as follows:
06/02/09 Buy-to-Close (BTC) 5 IWM Jun09 $47s @ $6.00
06/02/09 Sell-to-Open (STO) 5 IWM Jun09 $53s @ $1.51
Net Debit-Spread upon Roll-Up was $4.49 ($6.00 - $1.51)
Note: The price of IWM was $52.83 today when the debit-spread was transacted, so the remaining time-value was $.17 [$6.00-($52.86-$47.00)] when this transaction was executed.

The transactions history to date is as follows:
05/21/09 Initial Stock Purchase Transaction -- Bought 500 IWM @ $48.22
05/21/09 Inital Calls Sold Transaction -- Sold 5 IWM Jun09 $47.00 Calls @ $2.87
A roll-up debit-spread transaction was executed as follows:
06/02/09 Buy-to-Close (BTC) 5 IWM Jun09 $47s @ $6.00
06/02/09 Sell-to-Open (STO) 5 IWM Jun09 $53s @ $1.51
Note: The price of IWM was $52.83 today when the debit-spread was transacted.

The overall performance results(including commissions) for the IWM transactions would be as follows:
Stock Purchase Cost: $24,118.95
= ($48.22*500+$8.95 commission)

Net Profit:
(a) Options Income: -$835.40
= (500*($2.87-$6.00+$1.51) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $52.83): +$2,296.05
= ($52.83-$48.22)*500 - $8.95 commissions
(c) Capital Appreciation (If exercised at $53.00): +$2,381.05
= ($53.00-$48.22)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $52.83): +$1,460.65
= (-$835.40 +$0.00 +$2,296.05)
Total Net Profit(If stock price exercised at $53.00): +$1,545.65
= (-$835.40 +$0.00 +$2,381.05)

Absolute Return if Unchanged at $52.83: +6.1%
= +$1,460.65/$24,118.95
Annualized Return If Unchanged (ARIU) +73.7%
= (+$1,460.65/$24,118.95)*(365/30 days)

Absolute Return if Exercised at $53.00: +6.4%
= +$1,545.65/$24,118.95
Annualized Return If Exercised (ARIE) +78.0%
= (+$1,545.65/$24,118.95)*(365/30 days)

It should also be noted that this maximum potential annualized return (after the roll-up) of 78.0% is substantially higher than the 41.6% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the original $47.00 strike price upon Jun09 expiration.