SeaDrill’s stock has increased in price following the article, with the current situation as shown below:
|Purchase SDRL Stock||$31.31||$35.69||$4.38|
|Sell 2012 Jan 32 Call Option||$1.30||$3.90||$(2.60)|
|Buy 2012 Jan 28 Put Option||$1.15||$0.15||$(1.00)|
|Total Change||$0.78||or 2.5%|
If we closed the position today, we would realize a 2.5% return, but with SeaDrill's upcoming dividend payment exiting the position today would cause us to miss out on receiving the dividend.
SeaDrill will trade ex-dividend on 12/8/2011 due to its quarterly dividend payment of $0.76, so on 12/8/2011 SeaDrill may drop in price as a result, but this won’t affect our collar position, as the 2012 Jan 32 call option is significantly in-the-money at this point.
At this point, the time value for the 2012 Jan 32 call option is minimal, so typically I would say it’s either time to exit the position or manage the position, but with the upcoming dividend payment exiting is not a good idea since we want to receive the dividend payment, so this leaves us with managing the position.
For management, I’m looking at rolling the 2012 Jan 28 Call option to a 2012 Jan 35 call option with a price of $1.35. This enables us to pick up some additional time value and hold the stock for receiving the dividend. The PowerOptions tools indicates we’ll pick up about 2% of additional time value via the roll. I’ll leave the 2012 Jan 28 put option as is for protection. Rolling the call option increases our risk slightly over the initial position, but not significantly.
The details for entering the trade are shown below:
Buy-to-close 2012 Jan 32 Call $3.90
Sell-to-open 2012 Jan 35 Call $1.35
The trade should be entered as a two-leg trade with a net debit of $2.55. Executing the trade as a net debit will require $255 of additional capital per contract (100 shares).
The new call option is still $0.69 in-the-money, so as it is today, a change in the price as a result of being ex-divided on 12/8/2011 should only have $0.07 cents of impact, all else equal.
I’ll continue to monitor and post information related to this position.