Cream and Sugar Please!
Back in February 2012 I talked about a covered call on Tim Hortons Inc. (TSX: THI, Friday’s close $48.65). I don’t talk a lot about this company because THI options are not that liquid so when positions are established you will likely have to maintain the position through expiry.
In fact that is exactly what happened with the February 2012 article (entitled “Double Double”) where I talked about writing the October 54 calls at $2.45 against the then stock price of $52.81. The logic behind the sale of longer term calls had to do with the aforementioned liquidity issue and the fact that THI was a blue chip mature company with limited growth prospects. Better to collect the dividend and option premiums where possible.
The stock traded between $50 and $52 per share during October 2012 which meant the options expired worthless. Although during the course of the covered call THI spiked to a high of $57.08 in early May.
Had you owned the initial position you might have thought about re-writing another covered call when the October series expired. Say the April or July 52 calls? However, assuming that you did not re-write the calls and assuming that you are still holding the shares, I would suggest taking a look at writing the July 52 calls for a premium at $1.02.
The sale of the July 52 calls at $1.02 when added to the $2.45 premium received from the first covered call sale will effectively reduce the initial purchase price (assuming you bought in February 2012 at $52.81) to $49.34. That’s calculated as $52.81 initial purchase price (Feb 2012) less $2.45 premium from the sale of the October 54 calls less another $1.02 from the sale of the July 52 calls which equals $49.34. With this trade, you will continue to earn about 1.6% in dividend yield plus the additional capital gain from the sale of the calls.
The strategy with THI could apply to any blue chip mature company with a decent dividend, a solid franchise but below average growth prospects. The longer term covered call strategy will enhance cash flow which is central if you expect the security to tread water over a protracted period of time.
President, CIO & Portfolio Manager
Croft Financial Group
Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.
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