Any update chilliaa? Looks like your WES won't be exercised, & rolling up/out on the banks will be a lot cheaper today.
Final update for Oct:
I changed my mind during the course of the last two days.
A major headache of having covered calls in the money is you have to 're-act' rather than 'act'. An in the investment world a person who is reacting to circumstances is at a big disadvantage.
This is another negative of writing covered calls that i'm only finding out the hard way.
Anyway, i ended up covering my options on WES by buying both back at 15c on Wednesday. The reason for this was:
1) the share price was hovering around the call price.
2) at the time of execution the DOW futures where positive implying a possible upwards movement on the ASX on thursday (option expiry day)
3) if you wait until the last couple of hours on option expiry day you get raped by the market markers, you become a forced price taker if you want to roll positions (this can add several cents to the price unnecessarily).
Now the reason i bought back both instead of rolling one and letting one potentially lapse is i needed to buy time. I was getting too stressed being forced to
react and i wanted time to be able to think and
act.
WES is pretty fully priced at the moment.
They have an excellent business model which i have to take into account when determining the intrinsic worth of the company ( i will pay a higher price/my model has a higher intrinsic value for a quality company than an average company).
However having said this look at the price vs earnings and near term future earnings.
They reported an 2009 result of $1.7 EPS, but this is expected to fall in 2010 due to share dilution from capital raisings (i dont understand this fully but basically quoted EPS at period end is not just divided by shares on issue, but the weighted number of shares over the period adjusted for certain things) and also from lower expected earnings from their coal division.
Anyway so we start at an PE of around ($28/$1.7) 16.5 which is not too bad based on 09 earnings. However 2010 EPS is expected to bottom at around $1.35-$1.45, hence the PE will rise during 2010, but this is bottom of the cycle earnings. So we really need to go out to 2011 where the earnings should come in around $1.8 to $2 a share.
If i take the higher value and multiply it by the 10 year average PE of around 18 times earnings i get a maximum upside potential of around $2*18=$36 share price.
So if everything goes according to plan, and if the market pays what it historically has as a multiple i get a price in 2011 of $36 which is roughly 30% higher than current prices. I also get a dividend, but this is pretty crapy at current prices being only around 6% gross over the period.
So total return is (30%+6%+6%) or 42% over a two year time frame.
BUT THAT ASSUMES EVERYTHING GOES TO PLAN.
Where is my margin of error?
What happens if i am wrong in some assumptions?
Things rarely go according to plan.
Also what alternative investments are out there?
Can i beat 42% over a two year time frame from investing in some other companies?
What about cash flow? my cost of debt will rise over the next two years as interest rates go up. My current cost of finance with a margin loan is 6.85% after the last interest rate, but this will definately go up.
So basically i want to step back and access what i should do. I cant do this whilst the shares are under a covered call contract.
At the moment i am leading towards selling a portion of the shares and keeping the rest that way i hedge my bets.
It also gives me an oppportunity to reduce the margin loan. As the market recovers i want to reduce gearing. I am definately not comfortable keeping a high degree of margin debt throughout the cycle.