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
