Wednesday, November 14, 2012

Income Investor receives surprise gift.




When I invested in Conoco Philips, COP I expected to receive annual income increases because COP is a dividend machine.   I also expected price volatility.  Price volatility can lead to covered call income opportunities and indeed, COP provided that increased income over time.  But, the dividend and the covered call income are not the gift of which I write.


COP split up … yes it can be hard to do but in this case the split was good for us.  For every 100 shares of COP you owned, you received 50 shares of Phillips Petroleum (PSX) at a cost basis of $45.25.   A little personal note here:  my family always bought gas at a Phillips 66 station because the Finley family, my mom’s best friend, owned the station on the corner of US 20 so this trade has some emotion linked with it.


PSX has now paid two dividends and today you could buy PSX for $46 78. And sell a January 19, 2013 $50 call and receive a call premium of $1.75.  I like these types of gifts.  The tables below present the math on this trade using the cost basis of $45.25 and on the basis if you bought PSX today.

Spin Off Cost Basis

CALL OPTION
PSX 1/19/2013
Strike Price
$50.00
Cost Basis
$45.25
Call Premium
$1.75
Dividend
$0.00


Gain in $ if assigned
$6.50
Call Yield
3.50%
Gain Yield
13.00%
Total Gain Yield
13.00%

Today’s Cost Basis

CALL OPTION
PSX 1/19/2013
Strike Price
$50.00
Cost Basis
$46.78
Call Premium
$1.75
Dividend
$0.00


Gain in $ if assigned
$4.97
Call Yield
3.50%
Gain Yield
9.94%
Total Gain Yield
9.94%


Very Truly Yours,

TheMoneyMadam